Amfi asks mutual funds to check 'bonus stripping' practiceto prevent plans misuse

NEW DELHI : Industry body Amfi has asked fund houses to check the practice of 'bonus stripping', which has come under scanner for possible misuse of the bonus plans of mutual fund schemes for avoiding paying taxes.

The bonus stripping typically involves an investor buying a bonus plan of a mutual fund scheme, book a loss on it and then set it off against capital gains from other sources.

A best-practice guidelines circular in this regard has been sent to all mutual fund houses by the Association of Mutual Funds in India (Amfi).

Amfi, in its proposal, is believed to have asked the fund houses to refrain from launching such plans and from early disclosure of bonus payouts to lure such investors.

Issuance of bonus units does not violate any regulation, but it is certainly against the spirit of regulation, which may come under scrutiny by regulatory authority sooner or later, the industry body said.

Quantum Mutual Fund CEO Jimmy Patel said "the bonus plans is largely being used for tax arbitrage by investors."