Investors: Investors will pay more taxes on derivative profits

Mumbai: High Net Worth Individuals (HNIs), hedge funds, large foreign institutional investors and family offices may face higher taxes from next year on derived profits after the budget extended the scope of the “ bonus stripping” to prohibit the squaring of futures market gains with cash equity losses. In the budget, the government proposed to include equity trading as part of the “bonus stripping”, which until then only applied to mutual fund shares.

Bonus stripping is a mechanism by which an investor accrues losses by selling shares of companies immediately after bonuses are issued. These equity capital losses are then used to offset capital gains accumulated in derivative transactions. The strategy was popular among affluent investors since equity capital gains are subject to a 10-15% tax, depending on the holding period, while derivative transactions are subject to a 30% tax.

From April 1, losses recorded by investors due to a fall in stock prices after the free issues can only be adjusted against the capital gains realized on the free shares received.

“Some investors may have felt that premium stripping was a legitimate tax planning strategy because the anti-avoidance provisions prohibited premium stripping on mutual fund units and not on other securities. These investors will need to re-evaluate their positions,” said Suresh Swamy, Partner, Price Waterhouse & Co. “As the law will not come into effect until April 1, 2023, tax authorities are expected to apply the change prospectively.

Dividend stripping rules are also tightened

The Ministry of Finance did not respond to the request sent by ET. The government has also extended bonus stripping provisions to other asset classes, including real estate investment trusts (REITs), infrastructure investment trusts (InvITs) and alternative investment funds (AIFs). , according to budget documents.

In addition to bonus stripping, the government has also tightened the rules on dividend stripping. This also works similarly to bonus stripping, but instead of selling ex-bonus shares, investors sell shares after the dividend announcement to book losses that are offset by gains. The tax rules state that any capital loss can be used to offset capital gains realized for eight years.

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