The concept and tax implication on Bond washing, dividend stripping and bonus stripping.

1. BOND WASHING, DIVIDEND STRIPPING AND BONUS STRIPPING.
A: Bond washing: [u/s 94(1) of IT Act]
 These are transaction where the securities are sold before the interest date and then bought back
after the interest date.
 This is mostly done by the people in higher income slabs to avoid tax.
 These higher income people sell it to their lower income friends, relatives or so, as they will not be
having any taxable income.
 Also the transferor gets the interest from the transferee.
 To avoid such types of tax evasion transactions this section is brought in.
 Section 94(1) tells, “ Where the owner of the securities transfer such securities before the due date of
interest and buys it back immediately after the date of interest, the interest on such securities will be
the deemed income of the transferor and would be taxable in his hands.”
B: Dividend stripping: [u/s 94(7) of IT Act]
Dividend
stripping
Securities
Buys within 3
mts prior to the
record date*.
Sells it within 3
months after
such date.
Units
Buys within 3
mts prior to the
record date*.
Sells within 9
months after
such date.

2. December 20, 2018 Page 2
Background of the section:
The share prices before the record date would be higher compared to any other normal day’s price.
And it will drop immediately after the record date. This is because of the dividend declared. In such a case if
a person makes transaction of this kind, where he buys the security/unit before the record date and sells the
same after the record date, he will make STCL.
If the dividend so received by him is also exempt u/s 10(34), it is like giving that person double
benefit. ie. (i) STCL arises and (ii) Dividend income is exempt. To remove this only this section is framed.
C: Bonus stripping [u/s 94(8) of IT Act]
 This is applicable only to units.
STCL
STCL </=
Dividend
No STCL can be
claimed.
Which implies
that such loss
cannot be Set
off/ cf.
STCL > Dividend
Only STCL in
excess of
dividend shall be
claimed as STCL

3. December 20, 2018 Page 3
When the assesse sells the shares so bought and arrives at a STCL, the same will be assigned as the
cost of the bonus shares allotted. (Usually the cost of acquisition of bonus shares under CG is ‘NIL’.)
Ex. 1:
Mr. A buys 1000 shares 2 months prior to the record date and same is allotted with bonus shares in the ratio
1:1. He then sells 1000 shares 1 month after the date of allotment. So the STCL (Say Rs.2000) arising out of
the sale will become the cost of the remaining bonus shares. Ie. The cost of 1000 bonus shares will be Rs.2
each (Pro-rata basis).
Ex. 2:
In the above case if Mr. A sells 1200 shares. Then the STCL (Say Rs.1700), will be the cost of the remaining
(2000-1200=800) shares. Ie. Rs.2.1 per share.
Note: As per Section 45(2A)of IT Act, the transfer of securities take place in
FIFO basis.
*Record date: - The date announced by the company in case of declaration of any benefits (bonus or
dividend), within which the members are supposed to register their securities in their name.
Bonus
stripping
Units
Buys within 3
mts prior to the
record date*.