Start with exemption, not a falling share price
For FY 2025–26 and AY 2026–27, section 94(7) of the Income-tax Act, 1961 requires an exempt dividend or income and specified acquisition and disposal timing before its loss exclusion applies. Ordinary taxable dividends do not satisfy that exemption condition. A price decline around a record date is therefore insufficient. This guide addresses the exemption-first screen and capped loss working, rather than section 94(8)’s different bonus-allotment and retained-cost mechanism. The saved 1961 Act framework continues to govern FY 2025–26 / AY 2026–27 even when the return is filed after 1 April 2026; the new Act’s tax-year labels should not be substituted mechanically.
Read the applicable text: Income-tax Department: section 94(7), compared with section 94(8).
Apply the cumulative conditions
The provision tests acquisition within three months before the record date. It then distinguishes securities sold within three months after that date from units sold within nine months after it. Apply the explanation’s definitions of securities, units and record date; the unit definition includes the specified business-trust, section 115AB and AIF interests, rather than every asset described commercially as a unit. The dividend or income received or receivable must be exempt. If the conditions are satisfied, the loss is ignored only up to that exempt receipt or entitlement. Identify the instrument and the applicable window rather than applying the unit disposal period to every share sale.
Do not carry forward the old dividend exemption mechanically
The proviso to section 10(34) withdraws its general exemption for dividend received on or after 1 April 2020, subject to the stated exception for dividends on which section 115-O tax and section 115BBDA tax, wherever applicable, have been paid. Ordinary current dividends are therefore not automatically exempt. Section 10(35)’s historical exemption for the specified unit income also ceases for receipts on or after 1 April 2020; do not assume an ordinary current mutual-fund distribution is exempt merely because it arises from units. A company preparing its return must establish the actual treatment of its receipt; a historical ledger code saying exempt dividend is not legal evidence. Where an exemption is claimed, retain the operative provision, period, recipient eligibility and transaction-specific support. The conditional exempt-income illustrations below assume that independent exemption review has already succeeded; they do not assert that ordinary domestic dividends are exempt.
Calculate a transaction-level cap
First compute the ordinary loss using the applicable tax-cost and income-head rules. Where section 45(2A) applies to depository-held securities for capital gains, use its FIFO acquisition-cost and holding-period rule rather than selecting convenient lots. Then identify the related exempt dividend or income received or receivable and apply the smaller-amount cap. The excess loss is not automatically allowable: all other applicable conditions remain. Keep gross loss, section 94(7) exclusion and residual loss as separate fields. A total portfolio dividend figure should not be used to eliminate unrelated transaction losses without establishing the statutory connection.
Keep bonus stripping and cost accounting separate
Section 94(8) contains its own acquisition, additional-allotment, disposal and retained-holding tests, and expressly shifts ignored loss into cost of retained additional holdings. Section 94(7) does not contain that same cost-shift direction. Do not credit an arbitrary investment-cost account simply because a dividend-stripping loss is excluded. Where both kinds of corporate action occur, obtain a coordinated legal computation and avoid claiming or excluding the same amount twice.
Prepare an evidence-led closing working
Use record-date announcements, acquisition and disposal notes, dividend statements, entitlement records and the exemption opinion. Reconcile broker figures to the income-head computation and then to the relevant AY return utility. This article does not prescribe an unverified ITR serial number, a tax rate or a universal loss-filing deadline. The control objective is to explain why an adjustment is required, its exact cap and why other transactions remain outside that specific adjustment.
Six worked illustrations
All facts and amounts are fictional. Calculations illustrate the stated assumptions, not a predetermined legal outcome.
Illustrative example 1: Ordinary taxable dividend
A company buys securities for ₹1,00,000, sells for ₹85,000 and receives an ordinary taxable dividend of ₹8,000. The ordinary difference is a ₹15,000 loss. Even if timing conditions are met, the assumed taxable receipt fails section 94(7)(c), so the exclusion under that subsection is ₹0. Other loss rules still require review.
Illustrative example 2: Exempt entitlement below the loss
Assume exemption and both applicable timing conditions are independently established. Cost ₹1,00,000 less proceeds ₹70,000 gives ₹30,000 loss; related exempt income is ₹12,000. The exclusion is ₹12,000 and the residual loss is ₹18,000 before other restrictions.
Illustrative example 3: Exempt entitlement above the loss
On the same verified legal assumptions, cost ₹80,000 and proceeds ₹75,000 produce ₹5,000 loss against ₹9,000 exempt income. Only ₹5,000 is ignored. The subsection does not turn the ₹4,000 difference into a further addition or a negative loss.
Illustrative example 4: Different disposal windows
Acquisition is on 1 May 2025, record date 30 June 2025 and disposal 1 November 2025. Acquisition precedes the record date by 60 days; disposal follows it by 124 days. The sale is outside the securities three-month window but inside the unit nine-month window. Exemption and instrument classification must still be proved; elapsed days do not replace calendar-month testing.
Illustrative example 5: Receivable income is not limited to bank credits
Assume qualifying exempt income of ₹10,000 is receivable, with ₹6,000 received and ₹4,000 outstanding. Against a qualifying loss of ₹16,000, the section 94(7) cap uses ₹10,000, leaving ₹6,000. Using only the bank receipt would understate the exclusion by ₹4,000.
Illustrative example 6: Reconcile separately tested transactions
One qualifying transaction has a ₹20,000 loss and ₹7,000 related exempt income; another has ₹6,000 loss and ₹9,000 related exempt income. Exclusions are ₹7,000 and ₹6,000, total ₹13,000; residual losses total ₹13,000. Simply offsetting aggregate exempt income ₹16,000 against aggregate losses ₹26,000 would give a different, unsupported ₹16,000 exclusion.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the applicable period | FY 2025–26 and AY 2026–27 working-paper heading. |
| 2 | Classify each instrument | Security or unit evidence and applicable disposal window. |
| 3 | Identify the record date | Issuer or fund announcement. |
| 4 | Test acquisitions | Contract notes and three-month calendar test. |
| 5 | Test disposals | Sale records and security-versus-unit timing. |
| 6 | Verify exemption | Current legal basis, recipient eligibility and entitlement evidence. |
| 7 | Compute the ordinary loss | Tax-cost and income-head working. |
| 8 | Apply the linked cap | Transaction-level received or receivable exempt-income amount. |
| 9 | Check adjacent restrictions | Other loss rules and any separate bonus-stripping analysis. |
| 10 | Close the return bridge | Broker statement, adjustment register and final tax computation. |
Sixteen practitioner FAQs
1. Does a record-date price fall itself trigger section 94(7)?
No. The statutory conditions, including exemption, must be established.
2. Is this the bonus-stripping provision?
No. Bonus stripping is addressed separately in section 94(8).
3. Are ordinary domestic dividends automatically exempt in FY 2025–26?
No. Do not reuse the historical general dividend-exemption assumption.
4. Can a company be within this rule?
The provision applies to any person meeting its conditions.
5. What acquisition period is tested?
Three months before the record date.
6. Do securities and units have the same disposal window?
No. The provision distinguishes three months for securities and nine months for units after the record date.
7. Should calendar months be replaced with ninety days?
No. Test the actual statutory month-based period.
8. Is income receivable relevant before payment?
Yes. The text includes received or receivable income.
9. Can exclusion exceed the ordinary loss?
No. It ignores the loss only within the stated cap.
10. Can exempt income from another unrelated holding be used automatically?
No. Establish the connection to the securities or unit and the tested purchase and sale.
11. Is the residual loss always deductible?
No. Other cost, income-head and loss restrictions remain applicable.
12. Does taxable dividend income satisfy clause (c)?
On those facts, no. Taxability and exemption are different conditions.
13. Does section 94(7) create the same bonus-cost adjustment as section 94(8)?
No. Do not transfer that separate mechanism without legal basis.
14. Can broker average cost alone complete the working?
No. Verify tax cost, lot identification, entitlement and legal adjustments.
15. Do the hypothetical exempt-income examples establish a particular exemption?
No. They demonstrate the cap only after exemption is independently established.
16. What should the reviewer be able to reproduce?
The dates, exemption conclusion, original loss, transaction-linked cap and residual computation.
Official sources
Income-tax Department: section 94(7), compared with section 94(8)
Income-tax Department: repeal and transition guidance, including AY 2026–27