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.

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.

Tax Avoidance on WebNotes

Bonus stripping disallowance (Section 94(8))

Dividend stripping disallowance (Section 94(7))