Dividend Stripping refers to transacting in shares or securities linked to shares of a company on which dividend is payable.

According to Section 94 (7) where –

a)      Any individual buys or acquires any securities or units within a period of 3 months prior to record date ; and

Suppose Record date for Dividend / Income -31/07/2010 and Acquisition of share / Units of mutual Funds – within 3 months prior to the record date (01/11/2009 till 31/01/2010).

b)      Such individual sells or transfers such securities within a period of 3 months after such record date (i.e., 01/02/2010 till 30/04/2010) or transfers such units within a period of 9 months after such record date (i.e., 01/02/2010 till 31/10/2010).

c)      The dividend or income on such securities or units received or receivables by such person is exempt from tax,

Then in such cases, short term capital loss if any arising on the Sale or Transfer of Shares or Mutual Fund units, shall be ignored to the extent of dividend / income received or receivables.

Explanations:

i.            “Record date”–means date as may be fixed by-

1. A company for the purposes of entitlement of the holder of the securities to receive dividends; or
2. A Mutual Fund or the Administrator of the specified company, for the purposes of entitlement of the holder of the units to receive income.

ii.            “Securities”– includes stocks and shares.

iii.            “Unit”– means unit of a MF/Unit Trust of India.