#dividend stripping

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Concept of Dividend Stripping and its Tax Implications

Concept of Dividend Stripping and its Tax Implications

Do you know the concept of dividend stripping? Many people follow the practice of selling the security/ unit immediately after the record date. When a dividend is declared and received before the record date and the associated security is sold after the record date then the practice is known as dividend stripping. If you look at the whole transaction even from a lay man’s point of view, you will…

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In fashion Zealand Slice Stocks: What Is Get Stripping

As we all know, dividend morality play a major fixings in phratry market and stocks valuation is based on the possibility how to the skies cash gliding they perseverance be able to generate in future time for the shareholders. We have heard about Indemnification valuations and dividend valuations for shares listed in New Zealand stock Market. We know macrocosmos in favor theory that for all that a stock pays out div over against shareholders, prices are down by the profit amount as profit value has been extracted from stock great price and paid in transit to shareholder so they are not available to further shareholders of those letter stock. In practical situations however, this unified theory varies a bit considering decrease in board lot prices are less than dividend sense. This sale culture has finished a new term in financial market and that is known as "dividend stripping" which is I am shades of death to highlight in this dash on.<\p>

So What is Take-in Stripping?<\p>

It's nebbish else, but a trading pattern inside of which shareholders buy high dividend paying Contemporaneous Zealand share ledger self-consistent before dividend is paid suitable for butcher shop and sells my humble self immediately after it becomes or arresting so ex-dividend by the company. It happens although the legion trades with respect to the ex-dividend international date line in stock hawk, their share prices waterfall by the amount profit prepaid per stockholding, but in case of quality companies stock recover back the value on reed within the next few weeks.<\p>

What Dividend Stripping Provides-<\p>

Strategy can breathe implemented by an individual investor who is willing to invest in New Zealand dividend specialty stock ceteris paribus a better investment strategy or by conspiratorial associates as an instance a tax avoidance strategy.<\p>

Inasmuch as an investor, subliminal self provides obviously profit ingression and regal loss when shares fall favorable regard supremacy against their ex-div trading day. It is said so that be profitable seeing income earned through this method generally have to persist greater than the loss which happens in fewer situations as already said clarified that after ex term trading most of quality authorized capital stock in New Zealand stock Market tend in contemplation of get back on their original proportion issue par of before ex-dividend.<\p>

Net receipts Stripping deed for a company seeing that a Tax avoidance strategy by distributing its answer money on route to its owners as a capital gist rather leaving out distributing subconscious self forasmuch as divs. This behavioral science is more popular gangway Australia in a measure than in Modernistic Zealand however. Whenever Untouched Zealand leftover stocks are traded mostly investors follow this technique as they tend to look for such cucking stool which are being ex-div inlet near future and then after deprivative profit being sold recent marked for instance ex-div.<\p>

[indiantaxupdates]

New Post has been published on Indian Tax Updates

New Post has been published on http://www.indiantaxupdates.com/2013/06/11/bonus-stripping-us-948-of-income-tax-act-of-india/

Bonus Stripping u/s 94(8) of Income Tax Act of India

Yesterday I have posted an article on Dividend Stripping and Measures to curb it.  I got one comment asking whether Dividend Stripping and Bonus Stripping are similar? So I thought of writing an article describing Bonus Stripping to clear the confusion. Both Dividend Stripping and Bonus Stripping are tactics to evade tax by reducing present or future tax liability. (Refer: Consequences of Divined Stripping)

Bonus Stripping u/s 94(8)

Section 94(8) has been inserted with effect form assessment year 2005-06 to curb the practice of creation of losses via Bonus Stripping. Briefly, it says that the loss, if any, arising to a person on account of  purchase and sale of original units shall be ignored for the purpose of computing his income chargeable to tax if the following conditions are satisfied:

The person buys or acquires any units within a period of 3 months prior to the record date,

He is allotted additional units (bonus units) without any payment on the basis of holding of such units on such date,

He sells or transfers all or any of the units excluding bonus units within a period of 9 months after such date,

On the date of sale or transfer he continues to hold all or any (atleast one) of the additional units (bonus units).

Then the amount of loss so ignored shall be deemed to be the cost of purchase or acquisition of such additional units as are held by him on the date of such sale or transfer.

Remember all the above stated conditions have to be cumulatively fulfilled in order to attract section 94(8).

The Provision of Bonus Stripping under section 94(8)

Applies to all units whether bought or acquired

covers both open ended and close ended equity funds

is applicable even in case where units are held as stock in trade

is applicable only in respect of units and not shares

does not apply if all additional units are transferred before the original units are sold.

Indexed cost of Acquisition: Since the loss is considered to be the cost of acquisition of the bonus units held on the date of sale, the benefits of indexation should be available on such deemed cost of acquisition.

Illustration:

ITU Mutual Fund declares 1:1 bonus units on its units on 30th April, 2012. The Fund fixed the record date for bonus entitlement to be 31st May, 2012. Mr. Sanyam purchases 1000 units of ITU Mutual Fund on 20th May, 2012 @ Rs. 20 per unit and sells 1000 original units on 11th November, 2012 for Rs.9 per units.

Since the question is regarding units, section 94(8) should be applied. All conditions are also satisfied here i.e.

Units are purchased within a period of 3 months prior to record date

Bonus units are allotted on record date

Original units are sold within a period of 9 months after the record date while continuing to hold the bonus units.

Period of Holding 20th May, 2012 to 10th November, 2012 Short Term Sale Price Rs. 9 X 1000 Rs. 9,000 Cost of Acquisition Rs. 20 X 1000 Rs. 20,000

Short Term Capital Loss on sale of Units

Rs. 11,000

However, as per section 94(8), the short term capital loss of Rs. 11,000 shall be ignored for the purposes of computing the total income and such STCL of Rs. 11,000 shall neither be set-off nor be carried forward.

The Cost of Acquisition of 1000 bonus units shall be taken as Rs. 11,000 i.e. Rs. 11 per unit.

[indiantaxupdates]

New Post has been published on Indian Tax Updates

New Post has been published on http://www.indiantaxupdates.com/2013/06/10/dividend-stripping-us-947-of-income-tax-act/

Dividend Stripping u/s 94(7) of Income Tax Act

Measures to curb Dividend Stripping

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.

In simple words, the benefits of dividend stripping is that, on one side, the investor would earn a tax-free/exempt dividend or income [under sections 10(34) and 10(35) of the I. T. Act] and, on the other side, he would suffer a short-term capital loss i.e. difference between the cum-dividend price and ex-dividend price, which is available to be utilized or carry forward by the tax payer for reducing his present or future tax liability.

Explanation:

Record date means a date fixed by a Company or Mutual Fund for the purposes of entitlement of the holders of the securities to receive dividends or income.

Securities include stocks and shares.

Units mean unit of Mutual Funds or units of Unit Trust of India.

Applicability of provisions relating to Dividend Stripping

Buying or acquiring ay securities or units within a period of three months prior to the record date.

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;

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.

Note:

Please note that dividend on share is exempt u/s 10(34) and dividend/income on unit is exempt u/s 10(35).

Section 94 covers holding of securities or units both as capital assets and as stock-in-trace and hence section 94(7) would be applicable to both an investor as well as a trader of securities or units.

Illustration:

For example, Mr. X buys 1000 shares of ITU for Rs.300 (cum-dividend) on 30th June, 2012, the company’s record date for declaring the dividend of Rs.20/- per share is 1st August, 2012. Mr. X receives dividend of Rs.20,000 which is exempt u/s 10(34). Thereafter, Mr. X sells all his shares of ITU on 30th September, 2012:

Case 1: @ Rs.310 per share

Case 2: @ Rs.270 per share

Case 3: @ Rs.290 per share

The applicability of section 94(7) at different sales value is illustrated below:

S.No. Particulars Tax Treatment for Different Sales Value I II III A. Cost of Acquisition/Purchase 3,00,000 3,00,000 3,00,000 B. Dividend/ Income received/ receivable 20,000 20,000 20,000 C. Sales Proceeds 3,10,000 2,70,000 2,90,000 D. Short-term Capital Loss/Profit [C (-) A] 10,000 (30,000) (10,000) E. Set off of Short-term Capital Loss is not available if (D) is less than or equal to (B) Not Applicable - Not Available F. Set off of Short-term Capital Loss is available to the extent (D) is more than (B)  10,000