Bonus, dividend stripping rules extended to InvIT, REIT and AIF

Provisions pertaining to bonus stripping and dividend stripping will now be made applicable to securities and units.

Section 94 of the Income Tax Act contains anti-avoidance provisions to deal with transactions in securities and units of mutual funds which, inter-alia, include dividend stripping and bonus stripping.

However, the current provisions of sub-section (8) of Section 94 do not apply to bonus stripping undertaken in case of securities.

It is also not applicable to units of Infrastructure Investment Trust (InvIT) or Real Estate Investment Trust (REIT) or Alternative Investment Funds (AIFs) as the definition of the term “unit” has not been modified subsequent to introduction of provisions relating to REITs, InvITs etc.

Further, the current provisions of sub-section (7) of section 94 of the Act, i.e. provisions pertaining to dividend stripping, are not applicable to the units of new pooled investment vehicles such as InvIT or REIT or AIFs.

In view of the above, as per the Finance Bill, it is proposed to amend sub-section (8) of Section 94, pertaining to the prevention of tax evasion through bonus stripping, so as to make the said provision applicable to securities as well.

It is also proposed to amend the Explanation to the said section to modify the definition of unit, so as to include units of business trusts such as InvIT, REIT and AIF, within the definition of units.

This amendment will take effect from April 1, 2023 and will accordingly apply in relation to the assessment year 2023-24 and subsequent assessment years.




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