Investors to Pay More in Taxes on Derivative Profits

High-net-worth Individuals (HNIs), hedge funds, large overseas institutional investors, and family offices may have to pay more in taxes from next year on derivative profits after the budget extended the scope of ‘bonus stripping’ to disallow squaring futures- market gains with cash equity losses. In the budget, the government has proposed to include share transactions under the ambit of ‘bonus stripping’ which hither to applied only to mutual fund units.

Bonus stripping is a mechanism through which an investor books loss by selling shares of companies right after bonus issuances. These capital losses in equities are then used to offset capital gains accrued in derivative trades. The strategy was popular among affluent investors since capital gains in equity are subject to 10-15% tax, depending on the holding period, while derivative trades are subject to 30% tax.

From April 1, losses booked by investors due to a fail in share prices after bonus issuances can be adjusted only against capital gains accrued on the bonus shares received

“Some investors may have taken a view that bonus stripping was a legitimate tax planning strategy as the anti-avoidance provision barred bonus stripping on mutual fund units and not with respect to any other securities. Such investors will have to re-evaluate their positions,” said Suresh Swamy, partner, Price Waterhouse & Co, “As the law will come into effect only from April 1, 2023, the tax authorities should apply the change prospectively.” S-ET

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