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.

Dividend stripping disallowance (Section 94(7))

Tue, 12 May 2026 00:00:00 +0000

Dividend stripping disallowance under Section 94(7) of the Income Tax Act 1961 is an anti-avoidance provision that prevents investors from manufacturing artificial capital losses on mutual fund units by exploiting the fall in NAV that occurs after an IDCW (Income Distribution cum Capital Withdrawal) distribution. The scheme targeted was: buy units just before the IDCW record date (at a higher pre-IDCW NAV), receive the IDCW (taxed as income), sell the units after the ex-date at a lower post-IDCW NAV (claiming a capital loss), and use the capital loss to offset capital gains elsewhere. Section 94(7) disallows the capital loss on such transactions to the extent of the IDCW received, neutralising the tax benefit.

Section 94(7) on WebNotes

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

Dividend stripping disallowance (Section 94(7))