Dividend Stripping

Dividend stripping is a strategy where an investor buys shares or mutual fund units just before the dividend record date to receive tax-free dividend income, and then sells them at a lower price after the dividend is paid.

Since the price typically drops after the dividend payout, the investor books a capital loss while still earning the dividend. This loss can then be used to offset other capital gains, reducing overall tax liability.

To prevent misuse, tax laws restrict this practice. If securities are bought and sold within a specified time frame around the dividend date, the capital loss to the extent of the dividend received is disallowed.

In simple terms, dividend stripping tries to create a tax advantage using dividends and losses, but tax rules are designed to block this benefit.