After the bonus shares are announced investors buy shares with an intent to sell the original shares at reduced prices. This is as after the issuance of bonus shares, company's stock prices get adjusted in respect of the bonus shares i.e. in case 1 share is issued for 1 share, the price shall be reduced to half and likewise. This is to set off the loss incurred on sale of original units against any other capital gains.
So, while the original units may be sold initially to set off loss the remaining shall be held be for over 1-year to take advantage of LTCG gains at the 10% for gains over Rs. 1 lakh.
Change in bonus stripping rules In Budget 2022
Now investors henceforth shall not be able to utilise this technique to reduce their capital gains. This has been done by making an amendment in the Income tax Act. So, from the new fiscal year, bonus stripping will not be available.
Amendment brought in this Budget
In the budget the government has amended the definition of sub section (8) of section 94 of the Act containing an anti-avoidance to deal with bonus stripping and now even securities or even 'units' make a part of it.
Here is a brief about Sec 94(8):
The losses arising from such transactions will not be considered for the purpose of calculation of income for capital gain tax if -
Investors who buy the units within a period of 3 months prior to the record date (date on which bonus is allotted).
If such investor sells or transfers all or any of the original units within the period of 9 months after the record date.