Question

What is the tax implication of 'dividend stripping' in mutual funds?

Accepted Answer

If units are purchased within 3 months before record date and sold within 9 months after record date at a loss, the loss to the extent of IDCW received is disallowed as a deductible loss under Section 94(7) — Section 94(7) of the Income Tax Act prevents 'dividend stripping' — a strategy of buying units before dividend declaration to receive tax-advantaged dividends, then selling at a (loss) price that reflects the NAV fall post-dividend. If units are purchased within 3 months before and sold within 9 months after the record date at a loss, the loss (up to the IDCW received) is disallowed as a deductible capital loss.