Dividend Stripping and Bonus Stripping: Tax Rules in Securities (Income Tax Act 2025)

Section 175 of the Income Tax Act 2025 stops people from using securities transactions to cut tax. If you buy shares or units just before a record date, collect an exempt dividend or income, and sell soon after at a loss, that loss is ignored up to the amount of the dividend or income received (section 175(8)). If you buy, get free bonus securities, and sell the originals at a loss while keeping the bonus ones, the whole loss is ignored and added to the cost of the bonus securities (section 175(9) and (10)).

These are the arrangements people call "dividend stripping" and "bonus stripping". The section itself does not use those names. It also covers a third, older pattern: selling securities and buying them back so that interest or dividend lands with someone else (section 175(1) to (3)). The law below is as amended by the Finance Act, 2026, and applies from tax year 2026-27. This is information, not tax advice for your case.

What does section 175 of the Income Tax Act 2025 cover?

The section has several separate rules. Each targets a different trick.

Rule	Trigger	Effect	Provision
Sell and buy back	Owner sells securities and buys them back, or buys similar securities. Interest then becomes payable to someone other than the owner.	That interest is deemed the owner's income, not the other person's.	175(1), (2)
Income skipped	A person had a beneficial interest in securities during the tax year, but received no income, or less than day-to-day accrual would give.	The income from the securities for that year is deemed the person's income.	175(3)
Record-date loss (dividend stripping)	Buy within 3 months before the record date, sell within 3 months after it (securities) or 9 months after it (units). The dividend or income is exempt.	Loss ignored, up to the dividend or income received or receivable.	175(8)
Free additional securities (bonus stripping)	Buy within 3 months before the record date, receive additional securities or units for no payment, sell the originals within 9 months after the record date, and keep some of the additional ones.	The entire loss is ignored. It becomes the cost of the additional securities still held.	175(9), (10)

What do "interest", "securities", "unit" and "record date" mean here?

Section 175(11) defines the terms:

• Interest includes a dividend.
• Securities includes stocks and shares.
• Similar securities are securities that give their holders the same rights against the same persons as to capital and interest, with the same remedies to enforce them. A difference in total nominal amount, form of holding, or how they are transferred does not matter.
• Unit means a unit of a business trust (section 2(21)), a unit as defined in section 208(3)(c), or the beneficial interest of an investor in an Alternative Investment Fund. It includes shares or partnership interests in that fund.
• Record date is the date fixed by a company, a mutual fund or the Administrator of the specified undertaking or specified company (under the UTI Act, 2002), a business trust, or an Alternative Investment Fund. It is the date used to decide who is entitled to receive the dividend, income, or additional securities or units without any consideration.

How does the record-date loss rule work (dividend stripping)?

Section 175(8) applies only when all of these are true:

1. You buy or acquire the securities or units within three months before the record date.
2. You sell or transfer the securities within three months after the record date, or the units within nine months after it.
3. The dividend or income on them, received or receivable by you, is exempt.

If so, any loss from the purchase and sale is ignored when computing your income, but only to the extent it does not exceed the dividend or income received or receivable. Loss above that amount is still allowed.

Worked example 1: loss partly ignored (tax year 2026-27)

Assumptions: Meena buys 2,000 shares at Rs 50 on 20 January 2027. The record date is 15 February 2027. The company pays Rs 3 per share, and, for this example, the dividend is exempt in her hands (the rule bites only where it is; check whether your dividend or income actually is exempt). She sells all 2,000 shares on 10 March 2027 at Rs 46. The purchase is 26 days before the record date and the sale is 23 days after it, so both windows are met.

Step	Working	Rs
Cost	2,000 x 50	1,00,000
Sale value	2,000 x 46	92,000
Loss	1,00,000 - 92,000	8,000
Exempt dividend	2,000 x 3	6,000
Loss ignored	Lower of loss (8,000) and dividend (6,000)	6,000
Loss that can still be claimed	8,000 - 6,000	2,000

Worked example 2: the dividend is bigger than the loss

Assumptions: same dates as above, but the sale price is Rs 48 and the dividend is Rs 3 per share. Loss = (50 - 48) x 2,000 = Rs 4,000. Dividend = Rs 6,000. The loss ignored is the lower figure, Rs 4,000, so the entire loss is ignored and nothing is available to set off.

How does the bonus rule work (bonus stripping)?

Section 175(9) applies when you buy within three months before the record date, are allotted additional securities or units without any payment because you held the originals on that date, and then sell all or some of the originals within nine months after the record date while still holding some of the additional ones. The loss on the originals is ignored in full. There is no cap equal to a dividend here.

The ignored loss is not lost for good. Under section 175(10), it is deemed to be the cost of acquiring the additional securities or units you still hold on the date of the sale.

Worked example 3: bonus shares (purchase in 2026-27, sale in 2027-28)

Assumptions: Ravi buys 1,000 shares at Rs 200 on 5 January 2027. The record date for a 1:1 bonus is 1 February 2027, so he is allotted 1,000 bonus shares free. On 20 August 2027 he sells the 1,000 original shares at Rs 90 and keeps the bonus shares. 20 August is within nine months after the record date (which runs to 1 November 2027).

1. Cost of originals: 1,000 x 200 = Rs 2,00,000.
2. Sale value: 1,000 x 90 = Rs 90,000.
3. Loss: 2,00,000 - 90,000 = Rs 1,10,000. Under section 175(9) this loss is ignored.
4. Under section 175(10), Rs 1,10,000 is deemed the cost of the 1,000 bonus shares he still holds.
5. If he later sells the bonus shares at Rs 120 each (Rs 1,20,000), the figure to compare is Rs 1,20,000 - Rs 1,10,000 = Rs 10,000. How that gain is classified and taxed depends on other provisions of the Act, not on section 175.

What is the sell-and-buy-back rule in section 175(1) to (3)?

If an owner sells securities and buys them back, or buys similar securities, any interest that becomes payable on them to someone other than the owner is treated as the owner's income. It is not the other person's income, even if it would otherwise have been taxable in their hands (section 175(1)). Where similar securities are bought, the owner's liability must not be greater than if the original securities had been bought back (section 175(2)).

Section 175(3) is wider. If a person had a beneficial interest in any securities during the tax year and, because of a transaction, received no income or less than day-to-day accrual would give, the income from those securities for that year is deemed to be that person's.

Real-life example 1: the debenture sale

Kiran owns debentures with face value Rs 10,00,000. A few days before the interest date, he sells them to his friend Anita. After the interest is paid to Anita, he buys the debentures back. Under section 175(1), the interest paid to Anita is taxed as Kiran's income and is not Anita's income. Assume the half-year interest was Rs 40,000: Rs 40,000 is added to Kiran's income.

Real-life example 2: the mutual fund unit

Suresh, a salaried employee, has a large capital gain this year. He buys units of a fund three weeks before its record date, receives a payout of Rs 5,000 (assume it is exempt), and sells the units two weeks later at a Rs 12,000 loss. Section 175(8) ignores Rs 5,000 of that loss, the amount of the payout. The remaining Rs 7,000 can be set off in the usual way. Whether the payout is exempt in his hands is a condition for section 175(8) to apply at all; if it is taxable, the rule does not apply.

Can the Assessing Officer be satisfied that the rule should not apply?

Yes, for sub-sections (1), (2) and (3) only. Under section 175(4), these do not apply if the owner or the person with the beneficial interest proves to the satisfaction of the Assessing Officer either:

• that there was no avoidance of income-tax; or
• that the avoidance was exceptional and not systematic, and that in none of the three preceding years was there avoidance by a transaction of the nature in sub-sections (1), (2) or (3).

The text of section 175(4) does not extend this relief to the loss-ignoring rules in sub-sections (8) and (9). Those apply on the facts, without a "no avoidance" defence.

What about people who deal in securities as a business?

Under section 175(5), if a securities dealer buys securities and sells them back, and as a result the interest receivable by the dealer is not deemed to be the dealer's income under sub-section (1), the transaction is ignored when computing business profit or loss. Section 175(6) extends this to cases where similar securities are sold.

Can the tax department ask for details of my securities?

Yes. Under section 175(7), the Assessing Officer can serve a written notice requiring any person to give details of all securities they owned, or in which they had a beneficial interest, during a period named in the notice. The purpose is to apply section 175 and to check whether tax has been borne on the interest from all those securities. The time given must be at least 28 days.

Does section 175 affect long-term holders of dividend-option funds?

Only if the sale falls inside the windows. Section 175(8) needs a purchase within three months before the record date and a sale within three months (securities) or nine months (units) after it. Someone who holds units for longer than nine months after the record date, or who did not buy within the three months before it, is outside section 175(8). The same nine-month limit after the record date applies to the original units in section 175(9).

Quick reference

Item	Securities (shares)	Units
Buy window before record date	3 months	3 months
Sell window after record date, loss rule 175(8)	3 months	9 months
Sell window after record date, bonus rule 175(9)	9 months	9 months
Loss ignored under 175(8)	Up to the dividend or income received or receivable
Loss ignored under 175(9)	Entire loss, added to cost of additional securities held
Notice period for details, 175(7)	Not less than 28 days

Common mistakes

• Claiming the full loss on a pre-record-date purchase. If the dividend or income is exempt and the sale falls in the window, the loss is ignored up to that amount.
• Using the 3-month window for units. For units, the sale window after the record date in section 175(8) is nine months.
• Forgetting the cost adjustment in bonus cases. The ignored loss goes into the cost of the bonus securities you still hold (section 175(10)). Dropping it overstates the later gain.
• Assuming a tax-free sale-and-repurchase is safe. If interest or dividend goes to another person around the sale, section 175(1) can bring it back to you.
• Ignoring a notice under section 175(7). The minimum reply time is 28 days, but the notice is still a formal demand for your holding details.
• Treating the "no avoidance" defence as universal. It is stated in section 175(4) for sub-sections (1) to (3).

Where this is in the Act

• Section 175(1), (2): sale and buy-back, interest deemed the owner's income
• Section 175(3): income deemed where none or less than accrual is received
• Section 175(4): exception where no avoidance or exceptional avoidance
• Section 175(5), (6): securities dealers
• Section 175(7): notice for details of securities, minimum 28 days
• Section 175(8): loss ignored on purchase before and sale after record date
• Section 175(9), (10): free additional securities and deemed cost
• Section 175(11): definitions of interest, record date, securities, similar securities, unit
• Related definitions: section 2(21) (business trust), section 208(3)(c) (unit)

For a CA firm, the practical work is spotting these trades in a client's capital gains statement: purchases close to a record date, bonus allotments, and losses booked soon after. Finexo's practice management software helps you track client tasks, documents and deadlines in one place, so the review of such transactions does not get lost. It does not compute the tax for you.