Bonus stripping under Section 94(8) of the Income Tax Act

Mon, 18 May 2026 00:00:00 +0000

Section 94(8) of the Income Tax Act 1961 is an anti-avoidance rule that prevents bonus stripping by disallowing capital losses when securities or mutual fund units are purchased shortly before and sold shortly after a bonus issue. The rule is the parallel to Section 94(7) which addresses dividend stripping. Both rules operate to align tax treatment with economic substance and prevent artificial loss creation.

For Indian mutual fund investors, Section 94(8):

Dividend stripping under Section 94(7) of the Income Tax Act

Mon, 18 May 2026 00:00:00 +0000

Section 94(7) of the Income Tax Act 1961 is an anti-avoidance rule that prevents dividend stripping by disallowing capital losses when securities or mutual fund units are purchased shortly before and sold shortly after a dividend or IDCW distribution. The rule was introduced to prevent investors from artificially creating tax-deductible losses through dividend-stripping transactions.

For Indian mutual fund investors, Section 94(7):

Disallows capital losses arising from dividend-stripping patterns.
Specifies timing windows (3 months before purchase, 9 months after) that trigger the rule.
Affects IDCW distributions from mutual funds, not just corporate dividends.
Adds tax compliance considerations for investors trading around IDCW dates.

This article covers the rule mechanics, the timing windows, the impact on mutual fund IDCW transactions, and the tax-planning compliance considerations.

Anti-Avoidance on WebNotes

Bonus stripping under Section 94(8) of the Income Tax Act

Dividend stripping under Section 94(7) of the Income Tax Act