What is dividend stripping?
It is a technique used by various investors as a mode of tax avoidance. When the dividend is paid out of scheme, the NAV gets decreased by same amount so that there is no absolute loss or gain on account of dividend declaration. So the decreased NAV results in capital loss to the investors that can be used to offset any other capital gains and hence tax can be avoided. The income received from the mutual fund in the form of dividend is tax free in the hands of investors. To avoid such practice, regulatory authorities have made it mandatory to be in the scheme for at least three months prior and past of the ex dividend date in order to offset capital gain against capital losses.
