Bonus stripping is done in order to avoid tax evasion plans of investors.

 It provides that the loss, if any arising to a person on account of purchase or sale of original units shall be ignored for the purpose of determining the taxable income of the person, if all the following conditions are satisfied –

i.            The person buys or acquires any units within a period of 3 months prior to the record date.

ii.            He is allotted additional units without any payment on the basis of holding of such units on such date.

iii.            He has sold or transferred all or any of the original units within a period of 9 months after the date of record date.

iv.            On the date of sale or transfer, he held at least one of the additional units allotted to him.

Note: However, the amount of loss to be ignored shall be deemed to be the cost of purchase or acquisition of such additional units held on the date of such sale or transfer.

“Record date”– for the purpose of sec 94(7) means such date as may be fixed by-

a)      A company for the purposes of entitlement of the holder of the securities to receive dividends; or

b)      A Mutual Fund or the Administrator of the specified company, for the purposes of entitlement of the holder of the units to receive income.

Points beckoning clarification –

• This provision of this section applies to all units whether bought or acquired.
• It covers both open and close ended equity funds.
• It is also applicable where units are held as stock in trade.
• It is not applicable in respect of shares.
•  If all the additional units are transferred before the original units are sold then this provision would not be applicable.