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):

Bonus stripping disallowance (Section 94(8))

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

Bonus stripping disallowance under Section 94(8) of the Income Tax Act 1961 is an anti-avoidance provision that prevents investors from generating artificial capital losses on mutual fund units by receiving bonus units (additional units allotted at nil cost) and then selling the original units at a loss. The mechanism is structurally analogous to dividend stripping under Section 94(7) : bonus units, like IDCW distributions, reduce the NAV of the existing units without creating taxable income (bonus units are acquired at nil cost), and the resulting NAV decline in the original units can be engineered into a capital loss. Section 94(8) disallows the capital loss on the original units to the extent of the cost of the bonus units, which is notionally allocated from the loss on the original units.

Section 94(8) on WebNotes

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

Bonus stripping disallowance (Section 94(8))