|
One
is to one. One is to two. One is to three. When shareholders start
using terminology you thought you left behind in arithmetic class,
you know something is up. And something certainly was, when the
last quarter of fiscal 2003-04 drew to a close of near-giveaway
buoyancy in corporate circles.
Giveaway is just the word. In the last few
months, some 20 companies with swollen bottomlines have announced
bonus share issues-and more are to come. It is nice to get a surprise
gift-an additional equity share for every share you already possess
(if the bonus ratio is one-to-one). But the real reason to put an
extra spring in your stride is this: a bonus issue can save taxes.
How? Try 'bonus stripping'. Whether or not you already own shares
in a bonus-spewing company, it's an idea you won't be able to resist.
Stripping Advice
If tax collectors are frowning, blame the exuberance
of India's it and pharma companies. Infosys kicked off the festivities
with its jaw-dropping 1:3 bonus (three free shares for every one
owned), and it was quickly followed by Wipro's 1:2 bonanza. Other
ITEs firms such as MphasiS and pharma blue chips such as Sun Pharmaceuticals
have joined the ring too.
If you're among the recipients, good. Even
if you're not, you could still join the fun by buying into these
companies. Either way, it's time to consider the joys of 'bonus
stripping'. The idea, shorn to its minimum, is to book losses against
short-term (or long-term) capital gains, and thus save taxes.
Wait-a-minute... 'losses'... who said anything
about losses? Bonus stripping advisors did, and don't worry, they
only mean notional losses. It's simple, once you get the hang of
it. Take the example of Infosys' 1:3 bonus, the biggest Champagne-popper
of the lot. Assume its cum-bonus share price as Rs 5,000. Post bonus,
a shareholder gets three shares of Infosys for every share you hold
on the date of record (in this case, July 2, 2004). So for an investment
of Rs 5,000, you'll have four Infy shares ex-bonus. But the stockmarket
will discount the bonus issue, reducing each ex-bonus share's price
proportionately-to one fourth of the cum-bonus price. This means
that the ex-bonus price of an Infy share will be Rs 1,250, which
will become the share's prevailing market price.
Now comes the crux. Under Section 55 (2) (AA)
of the Income Tax Act, if you sell one share, it will be deemed
to have suffered a loss of Rs 3,750, since you bought this particular
share at Rs 5,000 (cum-bonus) and sold it for Rs 1,250 (ex-bonus).
Yes, the difference in the share's status allows you to do that.
Now, the Rs 3,750 loss is just notional, since
you have three other good shares as well. But it is good enough
for the tax code. You can book this loss against short-term profits
made elsewhere (any other money made in stockmarket trading or gains
you may make from property dealings, for example), and thus reduce
the size of the 'short-term capital gains' you make during the year
that would otherwise be taxed at a hefty 30 per cent.
It may look like accounting jugglery to you.
It is. But it's entirely legal, and well worth the effort. "I
have executed many such orders for my clients," says Sandeep
Jain, Head of HNI Desk at SSKI Securities, "It's a great to
way to save taxes on your short-term capital gains."
Final Brief
Bonus stripping works best, of course, if you
are in the active business of buying and selling shares-and will
thus have trading profits to report for the year. Even otherwise,
these 'losses' can also be carried forward to the next year if gains
do not accrue in the current year.
That's not the end of the story, though. Remember,
you save taxes by selling only the original quantity of shares you
had. That would still leave you with all the extra shares... the
actual 'bonus', so to speak. Under the Income Tax Act, bonus shares
are considered to have been acquired at zero cost, and will be taxed
only at the time of sale. Now, short-term capital gains (made on
shares held for under a year) are taxed at 30 per cent, and long-term
capital gains (made on shares held longer than a year) at just 10
per cent. So the best thing to do is to hold these extra shares
for over one year-thus ensuring that the profit from the sale of
bonus shares will qualify for long-term capital gains. Or maybe
not even that. Under the current income tax rules, long-term capital
gains on BSE 200 shares (as Infosys is) are completely exempt from
tax.
Assuming that you have several shares in your
portfolio, you can devise a strategy that maximises your overall
advantage. Remember, the higher the bonus ratio, the better it acts
as a tax-saver (thanks to bigger notional losses).
If you have huge short-term profits in your
kitty, then you might want to go in for serial bonus stripping.
Here's how. Since the record dates for bonus entitlement differ
from company to company, you can invest in each of these sequentially,
thus optimising your tax savings. For instance, if you had Sun Pharma
on May 29, its record date, you could've booked losses soon after,
and put the money in Infosys for July 2, and likewise later for
Wipro.
Do note, however, that you may end up holding
the residual shares of all these companies for quite some time (depending
on how large the bonus ratio is), since the extra shares will be
treated as zero-cost acquisitions and would clean you out on capital
gains if you sell them too early. So don't go for any company you
wouldn't want as part of a proper investment portfolio.
Unichem Laboratories (1:1 ratio), Wockhardt
(1:2), Alembic (2:1) and FDC (1:1) are among those that have announced
bonuses. Others include Haria Exports, T Spiritual World, BSEL Infrastructures,
Emami, Jubilant Organsys, Berger Paints, Gravity India, Suprajit
Engineering and Marico Industries. That's quite some choice. So
don't pick blindly.
|
