Shareholders and mutual fund investors, besides the returns they receive on the investments made, enjoy certain tax benefits too. 

However, smart investors indulge in an activity known as ‘Dividend Stripping’ and accordingly avail maximum tax benefits. Let us try and understand the concept of dividend stripping in detail and also see if the tax law of India has its own checks on the activity of Dividend Stripping.

Let us try and understand the concept of dividend stripping in detail and also see if the tax law of India has its own checks on the activity of Dividend Stripping.



Investors, in a bid to avail maximum tax benefits from an investment,  buy shares/mutual fund units before the declaration of dividend, post the dividend declaration they sell the share/unit when its price falls below the purchase price. This practice is termed as dividend stripping.

dividend stripping transaction is particularly lucrative for a taxpayer since by virtue of section 10 (34) of the Income Tax Act, dividend distributed by a company is not taxable in the hands of its shareholders. Further the taxpayer may claim a carry forward or setoff of the loss arising from selling the shares/units linked to shares of a company at a lower price. 

The concept of dividend stripping can be better explained by way of an example:

  • Company ABC makes an announcement that it is going to pay a dividend of Rs. 50 on April 5, 2019;  
  • Karan purchased the shares of this company on March 26, 2019, when the price was Rs.180. He purchased a total of 100 shares.
  • On April 5, 2019, he received a total dividend of Rs.5000.
  • The price of shares after dividend declaration fell to Rs. 150. Mr A sells the shares on May 20, 2019, and therefore makes a loss of Rs.3000.
  • Total benefit enjoyed by Mr Karan is thus Rs.8000 (exempt dividend income of Rs 5,000 and capital loss of Rs 3,000)



It is as such not illegal; however, it causes a loss to the exchequer. To address this, section 94 (7) of the Income-Tax Act was introduced. 

As per sec. 94(7), Where—

(a) Any person buys or acquires any securities or unit within a period of three months prior to the record date;

(b) Such person sells or transfers—

(i) Such securities within a period of three months after such date; or

(ii) Such unit within a period of nine months after such date;

(c) The dividend or income on such securities or unit received or receivable by such person is exempt,

then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.


  •  Mr. Pratik bought 1000 shares of A Co. Ltd. on Mar 2, 2018, for Rs.180/ share.
  • A Co. declared a dividend of Rs.40 that will be payable on Mar 31, 2018. So he earned an income of Rs.40, 000.
  • On April 20, 2018, Mr Pratik sold the shares of B Co. Ltd for Rs.120 per share. Thus he made a loss of Rs.60, 000.
  • The dividend income is wholly exempt in his hands.
  • Of the short-term capital loss made of Rs. Rs.60,000, as per Section 94(7), Rs 40,000 would be disallowed and he can claim a loss only to the extent of Rs 20,000.

If in the example mentioned above Mr. Pratik sold the shares at Rs 160 his capital loss would be lesser than the dividend received and accordingly, no loss would be available for set off.
On the other hand, if he makes a profit, his entire dividend will stand as exempted and the amount of capital gain will be charged to tax under capital gains.


Maitri Badani