22 September 2009
Dividend stripping generally involves purchasing a security, such as a stock or a share or a unit of a mutual fund, which is likely to declare a dividend shortly. Shortly after receiving the dividend, the person sells the share which has automatically fallen post dividend. As a result he incurs a short-term capital loss which is available for set-off against capital gains - both short-term and long-term - as the law stands at present. The dividend itself may be exempt from tax as most dividends declared by listed companies and mutual funds are exempt under the law as it stands at present.
For instance, assume that a person buys a share at Rs 108, and that the company declares a dividend of Rs 2 (for which dividend is exempt) and the share price, post dividend, falls to Rs 106 per share. The assessee, in such a case, achieves two benefits. Firstly, he receives the tax-free dividend of Rs 2 and at the same time he has short-term capital loss of Rs 2 which can be set-off against other capital gains.
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