Bonus-Stripping Strategy Can Help Reduce Capital Gains Tax
The 1:1 bonus announced on Infosys shares could help reduce your tax liability if the change in tax rules for debt funds is worrying you. The notional loss you will incur can be adjusted against gains from debt funds, stock, gold and even property, if you buy Infosys shares now and sell half your holding after bonus date.
Mr Vaibhav Sankla, director with tax consultancy company H&R Block, said “Selling the original shares soon after they are ex-bonus results in a short-term capital loss, which can be set off against other taxable short-term or long-term capital gains”.
Savvy investors to reduce capital gains tax use this bonusstripping strategy. The loss from the sale can be adjusted against taxable short-term and long-term capital gains from other investments, including debt funds, gold and real estate. You can also adjust short-term gains from stocks and equity funds against this loss. It can be carried forward for up to eight financial year, if the loss cannot be fully adjusted.
This budget upset the investors calculations by changing the tax rules for non-equity mutual funds. For long term capital gains it extended the holding period from one year to three years. If any investor sells before completing three years, the gains are added to the incoe and taxed at the normal rate. The investor will have to hold the bonus shares for at least one year or pay tax. Mr.Sudhir Kaushik Chief financial officer and co-founder of Taxspanner.com said,”Since the acquisition price of the bonus shares is considered zero, selling them before one year will attract 15% short-term capital gains.
If you have Infosys shares inyour portfolio for more than a year then this strategy will not work. Tax lawsfollow the principle of first-infirst-out. So, when you sell the shares after the bonus date, it will be deemed that you have sold the shares you already had in your portfolio.