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.
Bonus Stripping u/s 94(8)
Section 94(8) has been inserted with effect form assessment year 2005-06 to curb the practice of creation of losses via Bonus Stripping. Briefly, it says that the loss, if any, arising to a person on account of purchase and sale of original units shall be ignored for the purpose of computing his income chargeable to tax if the following conditions are satisfied:
Remember all the above stated conditions have to be cumulatively fulfilled in order to attract section 94(8).
The Provision of Bonus Stripping under section 94(8)
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Tarun Kumar Gupta
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