18 July 2024
The concept of "bonus stripping" under Section 10(38) of the Income Tax Act, 1961 applies to the scenario where an investor sells the original shares (on which bonus shares were received) within a specified period after the record date of bonus issuance, with the intention of availing tax-free long-term capital gains (LTCG) on the original shares.
### Understanding the Scenario:
Given the details provided:
1. **Purchase and Bonus Issue:** - X purchased 6000 units @ Rs. 70 per unit on 26th August 2009. - X received 2000 bonus units on 3rd November 2009 (record date).
2. **Sale of Bonus Units:** - X sells 800 bonus units on 26th February 2010 at Rs. 45 per unit.
### Steps to Calculate STCG:
#### Step 1: Determine the Acquisition Cost
- **Original Units:** - Number of original units purchased: 6000 units - Cost per unit: Rs. 70 - Total cost of original units = 6000 units * Rs. 70 = Rs. 4,20,000
- **Bonus Units:** - Number of bonus units received: 2000 units - These units are received tax-free as per Section 10(38).
#### Step 2: Determine the Sale Proceeds of Bonus Units
- **Sale of Bonus Units:** - Number of bonus units sold: 800 units - Sale price per unit: Rs. 45 - Total sale proceeds = 800 units * Rs. 45 = Rs. 36,000
#### Step 3: Calculate Short-Term Capital Gain (STCG)
- **STCG Formula:** - Short-Term Capital Gain = Sale Proceeds - Cost of Acquisition
- **For Bonus Units:** - Since the bonus units were received tax-free, their cost for taxation purposes is considered as nil.
Therefore, the STCG from the sale of bonus units = Rs. 36,000 (sale proceeds)
#### Step 4: Determine Tax Liability
- **Tax on STCG:** - Short-Term Capital Gains Tax = STCG * Applicable Tax Rate
For listed equity shares sold within 12 months of acquisition, the current tax rate is 15%.
In this scenario: - X received 2000 bonus units tax-free under Section 10(38) due to the bonus issue. - X sold 800 bonus units at Rs. 45 per unit on 26th February 2010. - The Short-Term Capital Gain (STCG) from the sale of these bonus units is Rs. 36,000. - Tax liability on this STCG is Rs. 5,400.
This calculation adheres to the principles of bonus stripping under Section 10(38), where the bonus units are received tax-free but any gains from their sale within a specified period (typically within 12 months) attract short-term capital gains tax.
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