Stripping

Bnus and dividend stripping are sophisticated tax avoidance devices. You buy securities and shares cum-bonus and cum-dividend and sell them ex-bonus and ex-dividend.

Dividend is tax-free and bonus shares are not considered as income. The fall in the share value after bonus and dividend results in a capital loss in respect to the original shares, which can be set off against other capital gains.

Section 94 (7) of the Income-Tax Act, 1961 aims at preventing tax avoidance by a set of transactions in shares or units which are `self-cancelling'. An investor selling shares and securities ex-dividend at a lower price incurs short-term capital loss which is neutralised by the tax-free dividend. There is no loss in monetary terms. The provisions of the section intend to plug the loop hole and prevent the tax avoidance.

nice explanation  Mr Ramesh Kumar Ahuja