Bonus Stripping
Bonus Stripping is practice of buying securities in advance of bonus securities record date (i.e. usually buying happens after bonus announcement but before record date) and selling original securities after ex-date thereby booking short term capital loss on original securities.
Under Sec. 94(8) of Income tax act, this short-term capital loss will be ignored (i.e. can’t be set off against capital gains) if securities are bought within 3 months prior to the record date and these securities are sold (fully or partially) within 9 months after record date. However this STCL will be treated as cost of acquisition for bonus shares.
This provision is applicable for MF units till recently and from April 2022, it was extended to Shares, REIT/InvIT units and AIF units.
Bond Washing
Bond washing is practice of selling securities some time before interest due date and acquiring back the securities after record date. Under Sec 94(1), in this case, interest income shall continue to be taxable in the hands of seller even though he/she is not legal owner of securities on due date.
Further under Sec. 94(2), where any person has had at any time during any previous year any beneficial interest in any securities, and the result of any transaction relating to such securities or the income thereof is that, in respect of such securities within such year, either no income is received by him or the income received by him is less than the sum to which the income would have amounted if the income from such securities had accrued from day to day and been apportioned accordingly, then the income from such securities for such year shall be deemed to be the income of such person. For eg. A bond has been held for 5 months by Mr. S and then it was sold. In this case, 5 months interest shall be taxable in the hands of Mr. A.
Exception to Sec 94(1) & (2) is when Assessing Officer is satisfied that a) there is no avoidance of tax or b) tax avoidance was exceptional & not systematic & there has been no such avoidance in his case for any 3 preceding years.