When your share loss is disallowed: dividend and bonus stripping

The first rule targets a classic manoeuvre: buying a share just before it pays a dividend, collecting the dividend, then selling just after when the price has dropped by roughly the dividend, and booking the fall as a loss. Under Section 94(7), if you bought the share within three months before the record date and sell it within three months after, the loss on the sale is disallowed to the extent of the dividend you received. For mutual-fund units the after-window is nine months.

So the loss and the dividend are netted against each other, and you cannot use the loss to shelter other gains while pocketing the dividend. The dividend stays taxable in your hands, and the loss simply disappears up to that amount. Any loss beyond the dividend is still allowed. The point is that the artificial part, the fall that matches the dividend, is stripped out.

The second rule catches the bonus version. You buy shares before a bonus record date, receive the bonus shares, and then sell the original shares, which have fallen in price because the bonus diluted them, at a loss. Under Section 94(8), that loss on the original shares is disallowed, but not simply lost: it is added to the cost of the bonus shares you kept. So the loss is deferred until you eventually sell the bonus shares, when the higher cost reduces the gain.

The important recent change is scope. Bonus stripping used to apply only to mutual-fund units, but it was extended to cover securities and shares, effective from the 2023-24 assessment year. So a bonus-stripping loss on listed equity, not just on funds, is now caught. For an NRI this matters because it is easy to assume a booked loss is available to set off, when the rule has quietly moved it into the cost of the bonus shares instead. A practising CA checks the record dates against your buy and sell dates, so a disallowed loss is treated correctly rather than wrongly claimed and later denied.