Bonus stripping - An intelligent tax planning

This tax planning is designed based on a loop hole in sec. 94(8) of Income tax Act.

Provision: Where, (a) any person buys or acquires any units within a period of three months prior to the record date; (b)  such person is allotted additional units without any payment on the basis of holding of such units on such date;(c)   such person sells or transfers all or any of the original units referred to in clause (a) within a period of nine months after such date, while continuing to hold all or any of the additional units referred to in clause (b)(i.e., Bonus units), then, the loss, if any, arising to him on account of such purchase and sale of all or any of such units shall be ignored for the purposes of computing his income chargeable to tax and the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units referred to in clause (b) as are held by him on the date of such sale or transfer.

On close observation of the above provision it is clear that it applies only in case of units and not for shares (or) securities. So the plan of action is as follows:
1. See the companies which are going to issue bonus shares.
2. Purchase the shares of those companies before the date of bonus issue
3. You will get Bonus shares.
4. After declaring bonus shares usually the price of share in the market will decrease ( Of-course the wealth of the shareholder wont change ). so, Sell the original shares (but not bonus shares) after the company declares bonus issue.
5. You will report a short term loss which can be set-off  against capital gains.
6. After one year from the date of allotment of bonus shares sell them through a recognized stock exchange by paying Securities transaction tax, so that long term capital gain is exempted.
Note: As on the date of publication of this article, No amendment is made to include securities, but the department is on the move for making amendment. so friends, exploit this as soon as possible.