03/02/22

INDIA: Investors to pay more in taxes on derivative profits.

As published on economictimes.indiatimes.com, Thursday 3 February, 2022.

High-net-worth individuals (HNI), 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 hitherto applied only to mutual fund units.

Bonus stripping is a mechanism through which an investor books losses 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 fall 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 provisions 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."

The finance ministry didn't respond to ET's mailed query.

The government has also extended bonus stripping provisions to other asset classes that include real estate investment trusts (REITs), infrastructure investment trusts (InvITs) and alternative investment funds (AIFs), budget documents showed.

Besides bonus stripping, the government has tightened rules on dividend stripping as well. This also works similar to bonus stripping but instead of selling stock ex-bonus, investors sell shares after dividend announcement to book losses that are set off against gains. Tax rules say that any capital losses can be used to offset capital gains made for eight years.