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Dividend Stripping - U/S 94(7)

Strategy behind Dividend Stripping
Dividend stripping is a strategy to reduce the tax burden, by which an investor gets tax free dividend by investing in securities (including units), shortly before the record date and exiting after the record date at a lower price, thereby incurring  a short-term capital loss. This short-term capital loss is compensated with the tax free dividend. Further the investor can set off such loss against capital gains – both short-term and long-term – as the law stands at present and can also carry forward the unabsorbed loss for set off in future years.
In simple words, the benefits of dividend stripping is that, on one side, the investor would earn a tax-free/exempt dividend or income [under sections 10(34) and 10(35) of the I. T. Act] and, on the other side, he would suffer a short-term capital loss i.e. difference between the cum-dividend price and ex-dividend price, which is available to be utilized or carry forward by the tax payer for reducing his present or future tax liability.

Explanation:
  • Record date means a date fixed by a Company or Mutual Fund for the purposes of entitlement of the holders of the securities to receive dividends or income.
  • Securities include stocks and shares.
  • Units mean unit of Mutual Funds or units of Unit Trust of India.
Applicability of provisions relating to Dividend Stripping
  1. Buying or acquiring ay securities or units within a period of three months prior to the record date.
  2. Selling or transferring such securities within a period of three months after such date, or such units within a period of nine months after such date;
  3. the dividend or income on such securities or unit received or receivable by such person during the intervening period is exempt from tax.
All the above conditions should be fulfilled for applicability of section 94(7), if any of the conditions is not satisfied then this section will not be applicable.

Note:
  1. Please note that dividend on share is exempt u/s 10(34) and dividend/income on unit is exempt u/s 10(35).
  2. Section 94 covers holding of securities or units both as capital assets and as stock-in-trace and hence section 94(7) would be applicable to both an investor as well as a trader of securities or units.


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