Chapter X - Special Provisions Relating to Avoidance of Tax
Section 175
Section 175: avoidance of tax by certain transactions in securities
Section 175 targets tax avoidance techniques built around buying and selling securities around interest, dividend or bonus dates - commonly known as bond washing and dividend/bonus stripping - by re-attributing income to its real owner and disallowing artificial losses.
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This article is for general information. Refer to the Income-tax Act, 2025 as amended by the Finance Act, 2026 and the Taxation and Other Laws (Amendment) Act, 2026 for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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-sections (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 receivable 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 have effect, subject to any necessary modifications, as if references to selling back or retransferring the securities included references to selling or transferring similar securities.
(7) The Assessing Officer may, by notice in writing, require any person to provide within specified time, which shall not be less than twenty-eight days, details in respect of all securities of which such person was the owner or in which he had a beneficial interest at any time during the period specified in the notice, for the purposes of this section and for the purpose of discovering whether income-tax has been borne in respect of the interest on all those securities.
(8) If— (a) any person buys or acquires any securities or unit within three months before the record date; (b) such person sells or transfers— (i) such securities within three months after such date; or (ii) such unit within nine months after such date; (c) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.
(9) If— (a) any person buys or acquires any securities or unit within three months before the record date; (b) such person is allotted additional securities or unit without any payment on the basis of holding of such securities or unit on such date; (c) such person sells or transfers all or any of the securities or unit referred to in clause (a) within nine months after such date, while continuing to hold all or any of the additional securities or unit referred to in clause (b), then, the loss, if any, arising to him on account of such purchase and sale of all or any of such securities or unit shall be ignored for the purposes of computing his income chargeable to tax.
(10) Irrespective of any other provision of this Act, loss ignored as per sub-section (9) shall be deemed to be the cost of purchase or acquisition of such additional securities or unit referred to in sub-section (9)(b) as are held by him on the date of such sale or transfer.
(11) For the purposes of this section,— (a) “interest” includes a dividend; (b) “record date” means such date as may be fixed by— (i) a company; (ii) a Mutual Fund or the Administrator of the specified undertaking or the specified company, where— (A) “Administrator” means the Administrator as referred to in clause (a) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002; (B) “specified company” means a company as referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002; or (iii) a business trust defined in section 2(21); or (iv) an Alternative Investment Fund defined in regulation 2(1)(b) of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, made under the Securities and Exchange Board of India Act, 1992, for the purposes of entitlement of the holder of the securities or units to receive dividend, income, or additional securities or units without any consideration; (c) “securities” includes stocks and shares; (d) securities shall be deemed to be similar if they entitle their holders to the same rights against the same persons as to capital and interest and the same remedies for the enforcement of those rights, irrespective of any difference in the total nominal amounts of the respective securities or in the form in which they are held or in the manner in which they can be transferred; (e) “unit” shall mean,— (i) a unit of a business trust defined in section 2(21); (ii) a unit defined in section 208(3)(c); or (iii) beneficial interest of an investor in an Alternative Investment Fund, referred to in clause (b)(iv), and shall include shares or partnership interests.
Introduction
Section 175 counteracts specified securities transactions that shift interest or dividend income around a sale and repurchase or similar acquisition. It also addresses loss on acquisition and sale of securities or units around record dates, with separate holding-period conditions.
Key takeaways
Securities income remains taxable
Selling securities before an interest entitlement and reacquiring them or similar securities can leave that interest deemed the original owner's income.
Avoidance exception
The rule may not apply if the owner proves no tax avoidance, or an exceptional rather than systematic avoidance meeting the section's three-year look-back test.
Interest deemed to remain the owner's income
Where the owner of securities sells or transfers them and buys back or reacquires them (or buys/acquires similar securities), any interest that becomes payable on those securities is deemed, for all purposes of the Act, to be the owner's income if it is receivable by someone else - and it is not treated as that other person's income, whether or not it would otherwise have been taxable to them.
Where similar securities are bought or acquired in this way, the owner is not under any greater income-tax liability than if the original securities had simply been bought back or reacquired.
Beneficial interest and apportionment of income
If a person has had a beneficial interest in securities at any time in a tax year, and as a result of a transaction relating to those securities (or the income from them) either no income is received by him, or less income than would have accrued day-to-day and been apportioned accordingly, then the income from those securities for that year is deemed to be his income.
Exception where there is no tax avoidance
These provisions (interest deeming, similar securities, and beneficial-interest apportionment) do not apply if the owner or beneficial-interest holder proves to the Assessing Officer's satisfaction that there was no avoidance of income-tax, or that any avoidance was exceptional and not systematic, and that no similar avoidance occurred in his case in any of the preceding three years.
Dealers in securities
Where a person carrying on a business of dealing in securities buys or acquires securities and sells them back or retransfers them, and the result is that interest receivable by him is not deemed his income because of the ownership-deeming rule, no account is taken of that transaction in computing the profits or loss of the business for any purpose of the Act. This applies with necessary modifications to selling or transferring similar securities as well.
The Assessing Officer may, by written notice, require a person to give details (within not less than twenty-eight days) of all securities owned, or in which they had a beneficial interest, during a specified period, to discover whether tax has been borne on the interest on those securities.
Record-date loss disallowance (dividend/bonus stripping)
If a person buys or acquires securities or a unit within three months before the record date, then sells or transfers the securities within three months after (or the unit within nine months after) that date, and the dividend or income on them is exempt, any loss on the purchase and sale - up to the amount of the exempt dividend/income received or receivable - is ignored when computing taxable income.
Similarly, if a person buys securities or a unit within three months before the record date, is allotted additional securities or units without payment based on that holding, and sells all or part of the original securities/units within nine months after the record date while continuing to hold all or part of the additional ones, any resulting loss is ignored for computing taxable income. That ignored loss is instead deemed to be the cost of acquisition of the additional securities or units still held on the date of sale.
Key definitions
| Term | Meaning under Section 175 |
|---|---|
| Interest | Includes a dividend |
| Record date | The date fixed by a company, a Mutual Fund/Administrator/specified company, a business trust, or an Alternative Investment Fund, for entitlement of security/unit holders to receive dividend, income, or additional securities/units without consideration |
| Securities | Includes stocks and shares |
| Similar securities | Securities that entitle holders to the same rights against the same persons as to capital and interest, and the same remedies, irrespective of differences in nominal amount, form of holding, or manner of transfer |
| Unit | A unit of a business trust, a unit as defined in Section 208(3)(c), or beneficial interest of an investor in an Alternative Investment Fund, and includes shares or partnership interests |
Step-by-step flow for applying Section 175
- 1
Did the owner sell securities and buy back the same or similar securities, so that interest (including dividend) went to someone else?
- Yes: That interest is deemed to be the owner's income, not the other person's (Section 175(1)), subject to the Section 175(4) exception.
- 2
Did a person with a beneficial interest receive no income, or less than day-to-day apportioned income, because of a transaction?
- Yes: The income for the year is deemed to be that person's (Section 175(3)), subject to Section 175(4).
- 3
Were securities or units bought within three months before the record date?
- No: Section 175(8) and (9) do not apply.
- Yes: Go to the next step.
- 4
Exempt dividend or income received, and the securities sold within three months (or the units within nine months) after the record date?
- Yes: Any loss on the purchase and sale is ignored, up to the amount of that dividend or income (Section 175(8)).
- 5
Bonus securities or units allotted, and the original ones sold within nine months while the bonus ones are still held?
- Yes: The loss is ignored and treated as the cost of the bonus securities or units still held (Section 175(9) and (10)).
Practical checklist
Do
- Build a dated ledger of acquisition, transfer, repurchase, record date, distribution and similar securities or units.
- Calculate the statutory loss disallowance or income attribution under the clause that matches the transaction.
Avoid
- Do not apply a single record-date rule to all securities and units without checking their different windows.
- Do not assume a repurchase must be of the identical security where the section also covers similar securities.
Illustrative example
Worked example: record-date loss rules
Hypothetical facts (illustration only, not a real taxpayer): Ms. Iyer buys units for ₹1,00,000 two months before a record date. She receives income of ₹8,000 on them, assumed to be exempt for this illustration, and sells them one month after the record date for ₹90,000. Separately, she buys 1,000 units of another fund at ₹100 each (₹1,00,000) one month before its record date, is allotted 1,000 bonus units free, and sells the original 1,000 units four months later at ₹55 each (₹55,000), keeping the bonus units.
First purchase: loss
₹1,00,000 - ₹90,000 = ₹10,000. All the Section 175(8) conditions are met: purchase within three months before, sale within nine months after, and exempt income.
First purchase: amount ignored
The loss is ignored only up to the exempt income of ₹8,000. The remaining ₹2,000 of loss is not hit by Section 175(8).
Second purchase: loss
₹1,00,000 - ₹55,000 = ₹45,000. Purchase within three months before, bonus allotted, originals sold within nine months, and bonus units still held, so the whole ₹45,000 is ignored (Section 175(9)).
Second purchase: cost of bonus units
Under Section 175(10), the ₹45,000 is deemed to be the cost of the 1,000 bonus units she still holds.
Outcome
- Loss taken into account: ₹2,000 from the first purchase, and nil now from the second. The ₹45,000 becomes cost when the bonus units are later sold.
- Whether the income is exempt, and how the remaining loss is set off, depends on other provisions of the Act.
Glossary
- Record date
- The date used to determine entitlement to a dividend, income or additional securities or units.
- Similar securities
- Securities treated as similar under the statutory rights-based definition.
Frequently asked questions
What is the record-date loss rule in Section 175 commonly used for?
It disallows artificial tax losses from buying securities or mutual fund units shortly before a record date and selling shortly after, where the dividend or income received was tax-exempt - a practice generally known as dividend or bonus stripping.
Can a genuine bond-washing-type transaction escape Section 175?
Yes - the interest-deeming and beneficial-interest provisions do not apply if the owner proves there was no avoidance of income-tax, or that any avoidance was exceptional and not systematic, with no similar avoidance in the preceding three years.
Does Section 175 apply to dealers in securities?
Yes, with a specific carve-out: where a securities dealer buys and resells (or retransfers) securities and the interest is deemed the original owner's income under this section, that transaction is left out of the dealer's own business profit/loss computation.
Need help applying this provision to your situation?
Talk to our tax team about securities transactions and record datesLast updated 10 October 2026