Section 175 Income Tax Act 2025: When Are Securities Losses Disallowed?

Section 175 contains anti-avoidance rules for certain transactions in securities and units. It addresses the diversion of interest or dividends, dividend stripping, bonus stripping, and related loss claims.

What does Section 175 prevent?

The section seeks to prevent tax advantages arising from temporary transfers of securities or units around income or bonus entitlement dates. It can attribute income back to an original owner, deem income to arise over a holding period, or disregard losses arising from qualifying dividend-stripping and bonus-stripping transactions.

Section 175 explained, sub-section by sub-section

Section 175(1): Sale and reacquisition of securities

If an owner sells or transfers securities and buys back or reacquires them, or acquires similar securities, interest payable on those securities that is receivable by another person is deemed income of the original owner, and not of the other person. For this purpose, interest includes dividends.

Section 175(2): Similar securities

Where the owner acquires similar securities rather than the original securities, the owner's tax liability cannot be greater than if the original securities had been reacquired.

Section 175(3): Beneficial interest and apportionment of income

Where a person held a beneficial interest in securities during a tax year but receives no income or less income than would arise from day-to-day accrual and apportionment, the relevant income is deemed to be that person's income.

Section 175(4): Exceptions

The attribution provisions in sub-sections (1) to (3) do not apply if the taxpayer proves to the Assessing Officer either that no income-tax avoidance occurred, or that the avoidance was exceptional rather than systematic and there was no comparable avoidance in the three preceding years.

Section 175(5) and (6): Securities dealers

Where a securities dealer acquires securities and sells or transfers them back, and interest is not treated as the dealer's income because of sub-section (1), the transaction is disregarded in computing business profit or loss. The rule extends, with necessary modifications, to transfers of similar securities.

Section 175(7): Information notice

The Assessing Officer may issue a written notice requiring details of securities owned or beneficially held during a specified period. The time allowed for furnishing the details must be at least 28 days.

Section 175(8): Dividend stripping

Where securities or units are acquired within three months before the record date and sold within three months after that date (securities) or nine months after that date (units), and the dividend or income received or receivable is exempt, a resulting loss is ignored to the extent of that exempt income. All statutory conditions must be met.

Section 175(9): Bonus stripping

Where securities or units are acquired within three months before the record date, bonus securities or units are allotted without payment, and some or all original holdings are sold within nine months after the record date while bonus holdings are retained, the resulting loss on the sold original holdings is ignored.

Section 175(10): Cost of retained bonus holdings

The loss ignored under sub-section (9) is deemed to be the acquisition cost of the additional securities or units retained on the date of sale or transfer. This provision preserves the disallowed amount as a cost component for the retained bonus holdings.

Definitions under Section 175(11)

Practical illustrations

Example 1: Dividend stripping

A taxpayer purchases qualifying units shortly before the record date, receives exempt income of Rs. 20,000, and sells the units within the statutory post-record-date period at a loss of Rs. 30,000. If every condition of Section 175(8) is satisfied, Rs. 20,000 of the loss is ignored; the remaining Rs. 10,000 is subject to the other applicable tax provisions.

Example 2: Bonus stripping

A taxpayer acquires units before the record date, receives additional units without consideration, sells the original units within nine months after the record date at a loss of Rs. 40,000, and retains the bonus units. If Section 175(9) applies, the Rs. 40,000 loss is ignored and, under Section 175(10), becomes deemed acquisition cost of the additional units retained at the time of sale.

Compliance points for taxpayers

• Preserve purchase and sale contract notes, demat statements, allotment records and record dates.
• Identify whether dividend or income was exempt for the relevant tax year.
• Check the three-month and nine-month windows applicable to the type of holding and transaction.
• Record whether bonus securities or units remained held when the original holdings were sold.
• Document commercial reasons for transfers and any defence under Section 175(4).

Frequently asked questions

Does Section 175 apply to every share sale at a loss?

No. The relevant statutory conditions must be satisfied. Ordinary sales at a loss are not automatically covered.

What is the period for dividend stripping?

Acquisition must occur within three months before the record date; disposal must occur within three months after it for securities or nine months after it for units, together with the exempt-income condition.

What happens to a loss disallowed under bonus stripping?

Under Section 175(10), the ignored loss is treated as the acquisition cost of the additional securities or units retained on the disposal date.

Is Section 175 of the 2025 Act the same as Section 175 of the 1961 Act?

No. Section 175 of the 2025 Act concerns certain securities transactions and broadly corresponds to Section 94 of the 1961 Act. Section 175 of the 1961 Act addresses assessment of persons likely to transfer property to avoid tax.

Statutory text and further reading

For authoritative interpretation, consult the current Act and applicable amendments and rules. The explanation above is a general guide, not a substitute for transaction-specific advice.

Last reviewed: 10 November 2026.