I heard my CA friend talk about it yesterday. He said he is going to be saving on taxes by bonus stripping on BEL after it goes ex-bonus on 14th Sept. what does that mean?
BEL current stock price is 3300, it is going exbonus on 14th with 2:1, so you get 2 shares for Rs 0 for every share of BEL you hold.
So on 14th, instead of having 1 share of BEL at 3300, you will have 3 shares but the value of BEL will most likely would have become 1100. So as you can see, a bonus issue doesn’t really add to value of the stock, instead of have 1 share at 3300, u will have 3 shares at 1100.
Bonus shares are usually issued by company when the share price goes up significantly in value and liquidity drops. So for example, more traders are likely to trade a 1000 rs stock, then a 3000 rs stock.
What a bonus issue does though is give a good tax saving opportunity.
Assume you had 1000 shares of BEL in your demat bought at 3000 (current price 3300)
After the bonus issue u will have 1000 shares at 3000 and 2000 shares at Rs 0 (the bonus shares). Like I said the stock price will drop to around 1100.
What if you sold 1000 shares of BEL that was bought at 3000 at 1100? Yes you will book a loss of Rs 19ks ( 1900 x 1000). If you had any other short term gain on which u had to pay 15% tax, you can easily set that gain to this loss and save 15% on taxes. So a saving of almost 3lks in taxes for just selling 1000 shares of BEL and buying it back again.
The only assumption here is that the 3000 shares of BEL u intend to hold for more than 1 year so that you get benefit of zero long term capital gain tax in India. If you sell before 1 year, you will have to pay 15% tax on 2000 shares that you got at 0 and the selling price. If u do this, the entire exercise would be of no use .
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