In the latest Budget, the government has made bonus and dividend stripping illegal in securities, Infrastructure Investment Trust (InvIT), Real Estate Investment Trust (REIT) and Alternate Investment Funds (AIFs).
The government has enhanced the scope of the prevailing law against dividend stripping in mutual funds to include the above investment classes. The amendment will be applicable from April 1, 2023.
Bonus or dividend stripping is a method used by taxpayers to bring down their tax liability through investments in bonus and dividend paying investment products. For instance, an investor buys REIT units at a price of Rs. 10. Assume that the company would announce a dividend of Rs.2 when the value of the investment reaches Rs. 11. Post the dividend payment, the value of the unit will come down to Rs. 9. Now, if the investor sells the unit, he will incur a loss of Rs.1 in theory. However, in reality, he is at a profit if we take the dividend payout into account.
As the investor didn't make a profit out of the investment (as per rules), he is not liable to pay any tax. Further, the capital loss becomes a tool for investors to offset capital gains from some other investment.
The government has aimed to plug this loophole in this Budget.
