Section 175 · Avoidance of tax
Section 175 of the Income-tax Act, 2025 — Avoidance of Tax by Certain Transactions in Securities (Dividend Stripping & Bonus Stripping)
By CA Rajat Agrawal
Updated 04 Jul 2026
Chapter X
📜 What the law says — Section 175, Income-tax Act 2025
175. (1) Where the owner of any securities (herein referred to as “the owner”)
sells or transfers such securities and buys back or reacquires them or buys
or acquires any similar securities, any interest that becomes payable in respect of
such securities,—
(a) is receivable by a person other than the owner, shall be deemed, for all
purposes of this Act, to be the income of the owner; and
(b) shall not be the income of the other person,
irrespective of whether it would have been chargeable to income-tax under any
other provision of this Act.
(2) Where similar securities as referred to in sub-section (1) are bought or acquired,
the owner shall not be under greater liability to income-tax than he would if the
original securities had been bought back or reacquired.
(3) If any person has had a beneficial interest in any securities at any time during a
tax year, and the result of any transaction relating to such securities or the income
from it is that, in respect of such securities within such year,—
(a) either no income is received by him; or
(b) the income received by him is less than what would have been if the
income from such securities had accrued from day to day and been
apportioned accordingly,
the income from such securities for such year shall be deemed to be the income of
such person.
(4) The provisions of sub-sections (1), (2) and (3) shall not apply if the owner, or the
person who has had a beneficial interest in the securities, proves to the satisfaction
of the Assessing Officer that—
(a) there has been no avoidance of income-tax; or
(b) the avoidance of income-tax was exceptional and not systematic and also
that in any of the three preceding years any avoidance of income-tax by
a transaction of the nature referred to in sub-section (1), (2) or (3) was
not there in his case.
(5) If a person carrying on a business which consists wholly or partly in dealing in
securities, buys or acquires any securities and sells back or retransfers the securities,
then, if the result of the transaction is that interest in respect of the securities receiv-
able by him is not deemed to be his income by reason of the provisions contained in
sub-section (1), no account shall be taken of the transaction in computing the profits
arising from or loss sustained in the business for any of the purposes of this Act.
(6) The provisions of sub-section (5) shall hav
In plain language
What Section 175 actually deals with
Although this page is filed under "transfer pricing," Section 175 of the Income-tax Act, 2025 has nothing to do with transfer pricing. Transfer pricing sits in Chapter X (broadly Sections 161 to 173). Section 175 is a stand-alone anti-avoidance provision titled "Avoidance of tax by certain transactions in securities." It is the re-enacted successor to Section 94 of the old Income-tax Act, 1961, and it comes into effect from 1 April 2026.
In plain words, Section 175 stops people from using clever buy-and-sell timing around a dividend date or a bonus-issue date to either dodge tax on interest/dividend or to manufacture an artificial loss that wipes out other taxable income. If you try such a scheme, the law simply ignores the trick and taxes you as if it never happened.
The three problems it targets
- Sale-and-buy-back of securities (interest/dividend shifting): If the owner of securities sells them and then buys back the same or "similar" securities, any interest or dividend that becomes payable in the meantime is deemed to be the income of the original owner, not of the temporary holder — even if it would otherwise be exempt or taxable in someone else's hands.
- Dividend stripping: Buying a share or mutual-fund unit just before the record date to grab a tax-free dividend, then selling soon after at a lower (cum-dividend to ex-dividend) price to book a "loss." Section 175 disallows that loss to the extent of the exempt dividend/income received.
- Bonus stripping: Buying units before a bonus record date, receiving free bonus units, then selling the original units at a loss while keeping the bonus units. The loss on the original units is ignored and instead added to the cost of the bonus units.
Who it applies to
- Every taxpayer — individuals, HUFs, firms, companies, FPIs, trusts — who deals in shares, debentures, bonds, government securities or mutual-fund units.
- It bites hardest on short-term traders and investors who buy close to a record date purely to capture a dividend or bonus and then quickly exit.
- It applies whether you are the legal owner or only the beneficial owner of the securities.
Key conditions, time limits and how the deeming works
- Dividend stripping (sub-section 8): Triggered when securities/units are bought within 3 months before the record date and sold within 3 months after the record date (9 months after, in the case of units). Any loss on that sale is disallowed up to the amount of the exempt dividend/income.
- Bonus stripping (sub-section 9): Triggered when units are bought within 3 months before the record date, bonus units are received, and the original units are sold within 9 months after the record date while the bonus units are still held. The loss is ignored and shifted to the cost of the bonus units.
- "Interest" includes dividend, and "securities" includes stocks and shares. "Similar securities" means securities giving the same rights against the same person — nominal value or the form of holding does not matter.
- Relief: The main deeming can be avoided if the taxpayer proves the transaction was genuine — that there was no avoidance of income-tax, or the avoidance was exceptional and not part of a systematic pattern (typically no similar transactions in the preceding three years).
How it interacts with other provisions
- It over-rides the normal capital-gains and business-income computation — a loss that would otherwise be allowed is simply denied or re-characterised.
- It works alongside Section 106 (GAAR — General Anti-Avoidance Rules) and the securities-related deemed-income rules; Section 175 is the specific, mechanical rule while GAAR is the broad backstop.
- Where a dividend is exempt or a special rate applies, Section 175 ensures the matching loss cannot be double-counted against other income.
Practical implications
- Do not buy a stock, bond or fund just to catch a dividend or bonus and then dump it within the danger window — the tax benefit will be reversed.
- Any disallowed loss on original units is not lost forever in the bonus-stripping case; it is added to the cost of the bonus units and reduces your future capital gain when you finally sell them.
- Keep clear records of purchase dates, record dates and sale dates so you can demonstrate a genuine investment motive if the assessing officer asks.
💡 Example
Example 1 — Dividend stripping. Riya buys 10,000 units of a mutual fund at ₹100 each (₹10,00,000) two weeks before the record date. The fund declares a dividend of ₹8 per unit, so she receives ₹80,000 (treated as exempt/already-taxed at fund level). The unit price then drops to ₹92 ex-dividend and she sells within a month for ₹9,20,000, booking an ₹80,000 "loss." Under Section 175(8), because she bought within 3 months before and sold within the window after the record date, the loss is disallowed to the extent of the ₹80,000 dividend received. Net effect: she cannot set that ₹80,000 loss against her other capital gains.
Example 2 — Bonus stripping. Arjun buys 1,000 units at ₹500 (₹5,00,000) shortly before a 1:1 bonus record date. He receives 1,000 bonus units free. He then sells the original 1,000 units within 9 months for ₹250 each (₹2,50,000), showing a ₹2,50,000 loss, while keeping the bonus units. Under Section 175(9), this ₹2,50,000 loss is ignored and instead added to the cost of the bonus units. So his bonus units now carry a cost of ₹2,50,000 — reducing his taxable gain only when he actually sells them later.
A relatable story. Think of it like buying a movie ticket only to claim the free popcorn coupon, then returning the ticket for a refund but keeping the popcorn — and telling the cinema you "lost money" on the ticket. Section 175 is the manager who says, "You already ate the popcorn; you don't also get to claim a loss on the ticket." The law lets you invest genuinely, but it won't let you engineer a paper loss out of a benefit you already pocketed.
| Scheme | Trigger (buy) | Trigger (sell) | Sub-section | Tax consequence |
|---|
| Sale & buy-back of securities | Sell then reacquire same/"similar" securities | Around the interest/dividend date | 175(1) | Interest/dividend deemed income of original owner |
| Dividend stripping (shares) | Within 3 months before record date | Within 3 months after record date | 175(8) | Loss disallowed up to exempt dividend received |
| Dividend stripping (mutual-fund units) | Within 3 months before record date | Within 9 months after record date | 175(8) | Loss disallowed up to exempt income received |
| Bonus stripping (units) | Within 3 months before record date | Original units sold within 9 months (bonus retained) | 175(9) | Loss ignored; added to cost of bonus units |
| Genuine transaction | Any | Any | 175(4) relief | No deeming if no/only exceptional, non-systematic avoidance |
Related sections
Section 94 (Act of 1961) — Old avoidance-of-tax-in-securities provision Section 106 — General Anti-Avoidance Rules (GAAR) Section 163 — International transactions (transfer pricing) Section 165 — Arm's length price and methods Section 198 — Meaning of income deemed to accrue in India Section 67 — Set off and carry forward of capital losses
Frequently asked questions
Is Section 175 of the Income-tax Act, 2025 a transfer-pricing provision?
No. Section 175 is an anti-avoidance rule on transactions in securities (dividend stripping and bonus stripping). Transfer pricing is dealt with separately in Chapter X, broadly Sections 161 to 173.
What was the old-law equivalent of Section 175?
Section 175 re-enacts and modernises Section 94 of the Income-tax Act, 1961, which also targeted dividend stripping, bonus stripping and sale-and-buy-back of securities.
What is dividend stripping in simple terms?
It is buying a share or fund unit just before a dividend record date to grab a tax-free dividend, then selling soon after at a lower price to book an artificial loss. Section 175 disallows that loss up to the amount of the exempt dividend.
What are the time limits I need to watch?
For dividend stripping: bought within 3 months before the record date and sold within 3 months after (9 months for mutual-fund units). For bonus stripping: bought within 3 months before and original units sold within 9 months after while keeping the bonus units.
If my loss is disallowed under bonus stripping, is it gone forever?
No. In bonus stripping the disallowed loss on the original units is added to the cost of the bonus units, so it reduces your taxable capital gain when you eventually sell those bonus units.
Can I avoid Section 175 if my transaction was genuine?
Yes. Relief is available if you can prove there was no tax avoidance, or that any avoidance was exceptional and not part of a systematic pattern of similar transactions.
Does Section 175 apply to companies and FPIs or only individuals?
It applies to all taxpayers — individuals, HUFs, firms, companies, trusts and foreign portfolio investors — who deal in shares, bonds, government securities or fund units.
C
CA Rajat Agrawal
Chartered Accountant, EaseValue · Reviewed 04 Jul 2026
This explainer is prepared and reviewed by EaseValue's tax team, based on the text of the Income-tax Act, 2025 (as amended by the Finance Act, 2026).
Disclaimer: This page explains the law in general terms for education and is not professional advice. The Income-tax Act, 2025 takes effect from 1 April 2026; provisions, thresholds and interpretations may change. Please confirm your specific position with our team before acting.
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