Section 94 Income Tax Act: Avoidance of Tax by Certain Transactions in Securities

Section 94 of the Income-tax Act, 1961 addresses arrangements that shift securities income or manufacture losses around distribution dates. For tax years commencing on or after 1 April 2026, the corresponding provision is section 175 of the Income-tax Act, 2025. The old section remains relevant to earlier years and proceedings saved under the new law.

Purpose and scope

The rules target temporary transfers of securities around interest or dividend dates, the allocation of securities income, dividend stripping and bonus stripping. Their application depends on the statutory conditions, relevant tax year and evidence of the transactions. The 2025 Act's section 94 is a different provision concerning amounts not deductible; it should not be confused with section 94 of the 1961 Act.

Explanation of section 94 of the 1961 Act

Sub-section (1): Sale and reacquisition of securities

If an owner sells or transfers securities and buys back or reacquires them, and interest payable on those securities becomes receivable by another person as a result, the interest is deemed to be the owner's income. Reacquisition includes similar securities, subject to the statutory limit on liability.

Sub-section (2): Beneficial interest and allocation of income

If a person has a beneficial interest in securities during a previous year and a transaction results in no income or less income than would have arisen on a day-to-day apportionment, the provision deems the appropriate securities income to be that person's income.

Sub-section (3): Statutory relief

Sub-sections (1) and (2) do not apply where the taxpayer satisfies the Assessing Officer that there was no tax avoidance, or that the avoidance was exceptional rather than systematic and there was no similar avoidance in the three preceding years.

Sub-sections (4) and (5): Securities dealers

These provisions prevent certain matched securities transactions from affecting a dealer's taxable trading profits or losses where interest is received but is not deemed to be the dealer's income under sub-section (1). Similar securities are covered.

Sub-section (6): Information notice

The Assessing Officer may require details of securities ownership or beneficial interests through a written notice, allowing at least 28 days for furnishing the particulars.

Sub-section (7): Dividend stripping

Where securities or units are acquired within three months before the record date and disposed of within three months afterward for securities, or nine months afterward for units, a loss is ignored to the extent of the exempt dividend or income received or receivable. This rule requires the distribution to be exempt; ordinary taxable dividends do not automatically meet that condition.

Sub-section (8): Bonus stripping

Where securities or units are acquired within three months before the record date, additional securities or units are allotted without payment, and the original holdings are sold within nine months while the additional holdings continue to be held, the specified loss is ignored. The disallowed loss is treated as acquisition cost of the retained additional holdings, as provided by law. The coverage of securities as well as units reflects the later amendment to this provision.

Important statutory definitions

Interest: Includes dividends for the purposes of this section.
Record date: The date fixed by the company or relevant fund or undertaking for determining entitlement to a distribution or additional holdings.
Securities: Includes stocks and shares.
Similar securities: Securities conferring equivalent rights against the same persons concerning capital and interest and equivalent enforcement remedies, despite differences in nominal amounts or holding or transfer forms.
Unit: Has the meaning assigned under the statutory cross-reference to section 115AB of the 1961 Act.

Illustrative applications

Dividend stripping: A taxpayer buys eligible units shortly before a record date, receives exempt income of Rs 12,000 and sells the units within the prescribed period at a loss of Rs 18,000. If all statutory conditions apply, Rs 12,000 of the loss is ignored and the remaining Rs 6,000 is considered under the other applicable tax provisions.

Bonus stripping: A taxpayer purchases qualifying units before a bonus record date, receives additional units without payment and sells the original units within the specified period while retaining the additional units. The qualifying loss on the original units is disallowed and added to the acquisition cost of the retained additional units as prescribed.

Income-tax Act, 2025 and transition from 1 April 2026

The Income-tax Act, 2025 came into force on 1 April 2026. Its section 175 corresponds to section 94 of the 1961 Act. Under the repeal and savings framework, earlier tax years continue to be administered under the applicable 1961 Act provisions. Verify the operative statutory wording and amendments for the year concerned rather than applying one year's rules indiscriminately.

Official law and guidance

This article is an explanatory guide, not a substitute for the enacted provision and professional advice on particular facts.