Bonus Stripping Rules Now Cover Shares, Not Just Fund Units

Bonus stripping is a straightforward mechanical trade: buy a stock shortly before a bonus issue, receive the bonus shares, then sell the original holding - whose price has dropped to reflect the bonus dilution - booking a loss that can be set off against other gains, while keeping the bonus shares to sell later at their own, separately calculated gain. Section 94(8) exists specifically to disallow this, and until recently it only reached mutual fund units.

The 2022 Extension Reached Shares, ETFs and Index Funds

The Finance Act 2022 extended Section 94(8), effective from 1 April 2023, to listed shares, ETFs, and index funds. The mechanics are identical to the mutual fund version: if the original units or shares are bought within three months before the record date and sold within nine months after it, any loss on that sale is disallowed - not lost outright, but added to the cost of the bonus units instead, deferring its use until those bonus units are eventually sold.

The Loophole It Closed Was Direct Equity

Before April 2023, the identical trade executed on a directly held stock, rather than a mutual fund unit, fell outside Section 94(8) entirely - a loophole the extension was written specifically to close. Investors running the strategy on individual shares, ETFs, or index funds under the assumption that the mutual-fund-only version of the rule still applied are running a trade that’s been directly covered for several years now.

The rule doesn’t prevent buying before a bonus issue or selling afterward - it only disallows treating the loss as immediately usable against other income. For anyone holding through a bonus issue with an eye on the tax loss it creates, the relevant question is no longer whether the security is a mutual fund unit, but whether the purchase and sale dates fall inside the three-months-before, nine-months-after window the section actually tests.

Test the dates, not the instrument. The question is no longer whether the security is a fund unit but whether purchase and sale fall inside the three-months-before, nine-months-after window - and the loss is deferred into the bonus units rather than lost.