Around March every year someone sends me a broker P&L with a large short-term loss and asks me to set it off against the year's gains. More often than you would expect, the loss comes from a stock bought a few weeks before a 1:1 bonus and the original shares sold soon after. The P&L is arithmetically right. The law just does not recognise that loss in that year.
The broker's software reports what happened in your account. It does not apply the anti-avoidance rules in Chapter X of the Income-tax Act. That is left to your return.
# The two rules, side by side
Both sit in Section 175 of the Income-tax Act, 2025, which replaced old Section 94 from 1 April 2026. The structure did not change in the move.
| Dividend stripping | Bonus stripping | |
|---|---|---|
| New Act | Section 175(8) | Section 175(9) and (10) |
| Old Act | Section 94(7) | Section 94(8) |
| Purchase window | Within 3 months before record date | Within 3 months before record date |
| Sale window, shares | Within 3 months after | Within 9 months after |
| Sale window, units | Within 9 months after | Within 9 months after |
| Extra condition | Dividend or income on it is exempt | You still hold some bonus when you sell the originals |
| Consequence | Loss ignored up to the exempt dividend or income | Entire loss ignored |
| What happens to the ignored loss | Gone | Becomes cost of the bonus shares or units |
"Unit" under the definitions in Section 175 covers mutual fund units, units of a business trust (REITs and InvITs) and units or beneficial interests in an AIF. "Securities" includes shares.
# How the rules grew: the 2022 amendment
Until FY 2021-22 bonus stripping applied only to mutual fund units. A trader could buy shares before a bonus record date, sell the originals at the ex-bonus price, book a large short-term loss against other gains, and hold the bonus shares at nil cost to sell later as long-term.
Finance Act 2022 closed this from AY 2023-24, so for transactions in FY 2022-23 onwards:
- bonus stripping was extended to securities, which means shares, and
- the meaning of "unit" was widened for both rules to include InvIT, REIT and AIF units.
The 2025 Act carries all of this into Section 175 without a change in substance.
# Dividend stripping: why it now bites on units, not shares
Look at the third condition: the dividend or income must be exempt in your hands. Before 1 April 2020 company dividends were exempt, because the company paid dividend distribution tax, so the rule caught the classic trade. You bought before the record date, took a tax-free dividend, and sold at a price that had fallen by the dividend, booking a tax-deductible loss.
Since FY 2020-21 a dividend on shares is taxable at your slab rate. The exempt-income condition is not met, the rule does not apply, and the loss is allowed. For most people the trade has also stopped making sense.
Example 1, shares. Illustrative figures, 30% slab, cess 4%, surcharge ignored. You buy 1,000 shares at ₹200. You get a dividend of ₹20 a share (₹20,000) and sell at ₹180, a loss of ₹20,000.
| Amount | |
|---|---|
| Dividend, taxable at 31.2% | Tax ₹6,240 |
| Short-term loss of ₹20,000, set off against STCG taxed at 20% + cess | Tax saved ₹4,160 |
| Net extra tax from the round trip | ₹2,080 |
Before tax the trade broke even. After tax you are ₹2,080 worse off. Section 175(8) does not even come into it.
Where it does come into it: REIT and InvIT units. The dividend component of a REIT or InvIT distribution is exempt from Tax Year 2026-27, whatever tax regime the SPV chose, following the Taxation and Other Laws (Amendment) Act, 2026. For units the sale window is nine months, not three.
Example 2, units. You buy 1,000 REIT units at ₹350 within three months before a record date. The distribution is ₹6 a unit: ₹4 exempt dividend (₹4,000) and ₹2 taxable interest (₹2,000). Five weeks after the record date you sell at ₹343.
| Amount | |
|---|---|
| Loss on sale (₹350 − ₹343) × 1,000 | ₹7,000 |
| Exempt income on the units | ₹4,000 |
| Loss ignored under Section 175(8) | ₹4,000 |
| Loss allowed | ₹3,000 |
Only the part matched by exempt income is ignored. The taxable ₹2,000 of interest does not count towards the cap. Take the split between exempt and taxable components from the trust's distribution notice for that record date, not from the bank credit, which shows only the total.
# Bonus stripping: the loss moves, it does not vanish
Example 3, shares. Illustrative figures. On 1 May you buy 1,000 shares at ₹500. The record date for a 1:1 bonus is 15 June, so the purchase is inside the three-month window. You get 1,000 bonus shares. The price adjusts to around ₹250, and on 1 August you sell the original 1,000 at ₹255 while keeping the bonus shares.
| Amount | |
|---|---|
| Loss on the original 1,000 shares (₹500 − ₹255) × 1,000 | ₹2,45,000 |
| Loss allowed this year | Nil, the whole amount is ignored |
| Deemed cost of the 1,000 bonus shares | ₹2,45,000 (₹245 a share) |
Without the rule the bonus shares would carry nil cost, and ₹2,45,000 of short-term loss would have been available this year. Set against STCG at 20%, that is ₹49,000 of tax before cess.
With the rule, if you later sell the bonus shares at ₹270, your gain is ₹25,000 (₹2,70,000 − ₹2,45,000) instead of ₹2,70,000. The loss comes back in full. You only get it later, and it may land in a different year, a different holding period and a different rate. The bonus shares' holding period runs from their allotment date, so selling within 12 months of allotment makes the gain short-term.
Two details catch people. First, the rule applies if you sell all or any of the original shares within the window, so selling half the original lot at a loss still triggers it for that half. Second, the dates are counted from the record date the company announces, not the ex-date you saw in a news alert or the date the bonus shares reached your demat account. Check the corporate announcement on the exchange website and note the record date against the lot.
Three things take a transaction outside the rule:
- You bought more than three months before the record date.
- You sold the originals more than nine months after the record date.
- You did not keep any bonus when you sold the originals.
The rule is mechanical. It has no motive test, so "I had a genuine reason to sell" does not help if the dates and holdings fit.
# Where buybacks fit
Buybacks are the other place where a record date, a payout and a capital loss meet. Between 1 October 2024 and 31 March 2026, buyback proceeds were taxed as a dividend in the shareholder's hands, and the cost of the shares tendered was allowed as a capital loss. That created a loss that looked a lot like a stripping loss. But the dividend-stripping rule needs the payout to be exempt, and a buyback dividend was taxable, so the rule did not reach it. The mechanics of that period are in our October 2024 buyback taxation article.
Finance Act 2026 reverses this from 1 April 2026. Buyback proceeds are again taxed as capital gains for shareholders, with an additional tax on promoter shareholders. So for buybacks in Tax Year 2026-27 you compute a normal gain or loss on the shares tendered. There is no dividend at slab rate and no separate capital loss. If you tendered shares in a buyback during FY 2025-26, that return still follows the October 2024 rules.
# Filing: what to actually do
- Your broker's tax P&L will not adjust for Section 175. It will show the full loss. The adjustment has to be made when you prepare the return.
- For bonus stripping, reduce the short-term loss you report by the ignored amount and add that amount to the cost of the bonus lot in your records. The benefit only arrives if the cost is remembered years later.
- For dividend stripping on units, keep the trust's distribution notice so you can show which part was exempt.
- Set-off works as usual for whatever loss survives. Short-term losses go against short-term and long-term gains. Long-term losses go only against long-term gains, and unabsorbed losses carry forward for eight years only if the return is filed on time. Our STCG and LTCG explainer covers the rates, and how to file ITR-2 with capital gains covers the schedule.
- Mutual fund investors: these rules have always applied to MF units. Bonus-unit plans are rare now, but the logic is the same. Our mutual fund taxation guide covers the rest.
If you also trade F&O or intraday, those results sit under business income and follow different rules. See the F&O and intraday traders' tax guide.
Report the loss the law will accept, not just the one your broker shows. Bring every broker's P&L into one Capital Gains Tracker and check the trades that fall around record dates before you file. Start free →
# References (verified 23 September 2026)
- Income Tax Department: Section 175, Income-tax Act, 2025 (avoidance of tax by certain transactions in securities). https://www.incometaxindia.gov.in/w/section-175-77
- Income Tax Department: Section 94, Income-tax Act, 1961. https://www.incometaxindia.gov.in/w/section-94-58
- TaxTMI: Finance Act 2022, bonus and dividend stripping provisions extended to securities and units. https://www.taxtmi.com/tmi_notes?id=674
- PIB: CBDT FAQs on the capital gains changes in Union Budget 2024-25. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2036604®=48&lang=2
- KPMG India: Taxation of buy-back, a merry-go-round (Budget 2026). https://kpmg.com/in/en/blogs/2026/02/taxation-of-buy-back-a-merry-go-around.html
- Dewan P N Chopra and Co.: Finance Act 2026, some key amendments (buyback effective 1 April 2026). https://www.dpncindia.com/finance-act-2026-some-key-amendments
- PRS Legislative Research: The Taxation and Other Laws (Amendment) Bill, 2026. https://prsindia.org/billtrack/the-taxation-and-other-laws-amendment-bill-2026
Disclaimer: This article is educational and general in nature. It is based on Section 175 of the Income-tax Act, 2025 and Section 94 of the Income-tax Act, 1961 as applicable to each year. All examples use illustrative prices and assumptions, ignore surcharge, and do not refer to any real security. VittSphere ONE is not a SEBI-registered Investment Adviser or Research Analyst, and nothing here is a recommendation to buy, sell or hold any security or to time a trade around a record date. Confirm how these rules apply to your trades with a Chartered Accountant before filing. Data verified 23 September 2026.
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