What is bonus Stripping?
Bonus stripping is an option available for Investors to incur short-term capital loss legally to plan tax obligations.
When does this opportunity arise?
When a company announces bonus
How does it work ?
Let’s take the example of Bharat Forge which announced a bonus of 1:1 with September 30, 2017 as its record date. This means that anyone who buys the stock on or before 27th of September will be eligible for the bonus shares.
- Let’s assume that ‘A’ buys 1000 shares on 27th September 2017 at 1290.
- The stock moves ex-bonus on 28th September by when it touched a high of 615.
- ‘A’ sells 1000 Bharat Forge at, let’s assume 615, and books a short-term loss of Rupees 675 per share (1290-615), ie. 6.9 lakhs on 1000 shares.
- ‘A’ however buys 1000 shares on or after 29th September to retain it in his portfolio.
This short-term loss of 690000 can be adjusted against short-term capital gain while filing returns or can be carried forward to the next 8 years to be adjusted against future short-term capital gains. This is called bonus stripping.
What are the benefits?
- ‘A’ gets an opportunity to book a short-term capital loss that can be adjusted against short-term capital gain.
- He also gets bonus shares of 1000 shares (as shares were sold at ex-bonus price)
- He also retains the original shares sold by buying them back subsequently.
October, being results season, watch out for good stocks that announce bonus to take benefit of Bonus Stripping.