Thursday, February 26, 2009

Dividend Stripping Simplified

I had bought units worth Rs 49,000 of a mutual fund about a month back and had chosen the dividend payout option. I have received dividend of about Rs 5,000 during the last one month and the current value of my units is about Rs 40,000. I would now like to redeem the units as I need the money. Would I be eligible for a short-term loss of  Rs 9,000 or would this constitute dividend stripping which is not allowed? What are the rules on dividend stripping and how do I calculate tax in case there is a genuine need to redeem?

The benefit of dividend stripping is no longer available. Under the revised laws, it has been provided that if an investor were to acquire a unit within a period of three months from the record date and sell or transfer the same within a period of nine months from the record date, then any loss arising from the transaction shall be ignored to the extent that the loss does not exceed the amount of such dividend. Hence, the capital loss exceeding the amount received as dividend is eligible to be claimed as a short term capital loss.

If you withdraw your investment at Rs 40,000, then you incur a short-term capital loss of Rs.9,000. Out of this, you have already received Rs 5,000 as dividend. So as per the income tax regulations, the balance Rs 4,000 can be claimed as short term capital loss.