Q- What is dividend stripping ?
- Relevant in case of equity MF’s in the short term.
- Dividends can be result into a capital loss.
- Large dividends resulting into a large capital loss are misused. Equity MF Dividend -> Tax Free Short Term Capital Gains(STCG) -> taxed at 15% Debt MF DDT(Dividend Distribution Tax) -> 28.84 % Only beneficial tax bracket -> 30% – short term Gains : STCG -> Tax Slab LTCG -> 20% after indexation. NAV =100 example: Invested in an equity MF. After 2 months, NAV =Rs 110 Dividend = Rs 20/unit New NAV = Rs 90 Capital Loss =Rs 100 – Rs 90 = Rs 10 per unit Investment made 3 months before being redeemed after 9 months. Dividend Stripping -> So, usual dividend amount = 10% NAV. Large Dividend = more than 15 % of NAV. Large Capital Loss.
ELSS : Equity Linked Savings Schemes
Diversified Equity MFs where the fund has to invest a min 80 % of its total assets in equities.
Investment Amount is tax exempted under Section 80C within its overall limits of Rs 1.5 lacs.
Have a lock -in of 3 years.
Returns above 1 lac in redemption year are taxed at 10% (Returns till 31/1/18 exemp).
Two Options : 1)Growth 2) Dividend (taxed at 10 %): LTCG -> Taxes
Advantages of ELSS
1) Low lock -in period of 3 years as compared to other tax saving options like PPF, NSC, Tax Saving FD’s.
2) Give better returns (last 5 years avg returns : 19.8 % pa).
3) Gateway to equity investing.