Smart tax saving via strategic bonus stripping

There is a legal tax-trap for bonus stripping, however, some patience and understanding can reap smart tax saving

- JIGAR MUKESH PATEL

Issuing bonus shares is a popular mode by which companies reward their shareholders. Bonus shares are allotted to shareholders out of the free reserves of the company without any cost being recovered from them. The issue of bonus shares is decided by the board of the company, based on a proportion to the actual number of shares held by each shareholder.

Receipt of Bonus Shares Taxable? There is no tax liability in the hands of the shareholder on actual receipt of bonus shares, as it is not in the nature of any income distribution. However, under Section 55 of the Income-tax Act, the cost of acquisition of the bonus shares is treated as 'Nil,' thus giving rise to liability for capital gains tax at the time of their sale. Post bonus issue, the cost of the pre-bonus holding is treated at the same value and not averaged down on a proportionate cost basis.