What is dividend stripping transactions under income tax ?

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.

Applicability of provisions relating to Dividend Stripping

1. Buying or acquiring ay securities or units within a period of three months prior to the record date.
2. Selling or transferring such securities within a period of three months after such date, or such units within a period of nine months after such date;
3. the dividend or income on such securities or unit received or receivable by such person during the intervening period is exempt from tax.

All the above conditions should be fulfilled for applicability of section 94(7), if any of the conditions is not satisfied then this section will not be applicable.