Dividend Stripping Transaction

As per the text of Income Tax Act, 1961,

Section 94(7) says, Where -

(a) any person buys or acquires any securities or unit within a period of three months prior to the record date;

(b) such person sells or transfers—

(i) such securities within a period of three months after such date; or

(ii) such unit within a period of nine months after such date;

(c) the dividend or income on such securities or unit received or receivable by such person is exempt,

then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax.

In simple terms,

Dividend stripping refers to transacting in shares or securities linked to shares of a company on which dividend is payable. Typically, a dividend stripping transaction involves the following steps:

1. Purchase of securities/ units linked to shares of a company on which dividend is payable, at a price, say INR 100

2. Holding on the investment in the above securities/ securities linked to shares of a company and enjoying the benefit of dividend distributed on such investment, say INR 10.

3. Sale of the securities/ units linked to shares of a company at a lower price, say INR 85. This fall in price of the shares/ units linked to shares of a company is largely attributable to the dividend payout.

A dividend stripping transaction is particularly lucrative for a taxpayer since by virtue of section 10(33) of the ITA, dividend distributed by a company is not taxable in the hands of its shareholders. Further, the taxpayer may claim a carry forward or set off of the loss arising from selling the shares/ units linked to shares of a company at a lower price. Interestingly, section 94(7) of the ITA provides that only so much of loss is available for set-off or carry forward, which exceeds the amount of dividend earned on the shares/ units linked to shares of a company. In effect, in the above example the taxpayer would have incurred a loss of INR 15 by virtue of sale and purchase of the shares (100-85 = 15), however by virtue of section 94(7), only INR 5 (15 – 10 = 5) would be available as loss for set of and carry forward purposes.

In its recent ruling of CIT, Mumbai v. M/s Walfort Share and Stock Brokers Pvt. Ltd., the Supreme Court of India has held that losses arising from the purchase and transfer of units of a mutual fund, on which dividends have been freshly paid (also known as ‘dividend stripping’), are genuine.

The above analyzed ruling is noteworthy for two reasons. Firstly, the Supreme Court of India upheld the validity of dividend stripping transactions, as permissible affair under tax laws. Secondly, this ruling is yet another recognition of the distinction between tax avoidance and tax planning. The Supreme Court has reiterated that tax planning is perfectly valid, since it is within the four corners of law.

It is important to note that the Indian government is planning to introduce the Direct Tax Code (“DTC”) from April 2012. The DTC proposes to introduce a General Anti Avoidance Rule (“GAAR”), which could empower tax authorities to re-characterize a transaction entered into by a taxpayer and the income there from. The GAAR provisions are proposed to override the other provisions of the DTC. Currently tax planning is considered as legal. However, it remains to be seen how GAAR would impact tax planning by taxpayers, including in cases of dividend stripping.

Gold Linked Debentures... Less Risky and reasonable returns

Gold-linked hybrid products are non-convertible debentures where the rate of interest is linked to spot gold prices. It Helps protect capital and also gains from the upside in equity markets

Recently, gold has caught the fancy of companies. Some broking houses and asset management companies have launched gold-linked debentures. The amount that can be invested is Rs 5 lakh to Rs 5 crore. The product also has a lock-in of three years. This Product is structured for investors willing to take exposure to other asset classes like gold, but with limited risks.

The product functions like this: The fund manager invests 80 per cent of the money in three-year fixed income bonds like government securities or AAA-rated bonds. The rest is used to buy gold options in overseas markets, with regular churning. Typically, fixed income securities give around 20 per cent returns for a period of three years. So, 80 per cent of the amount invested in debt instruments will give 20 per cent returns, protecting your initial investment.

The additional gains come from gold options. Depending on the price at which you invest, real returns on the gold portfolio over three years may range between 30 per cent and 50 per cent or more. As a result, the total return on the hybrid product will be 12-15 per cent per annum.

There are also options where a person can opt for higher exposure to gold. In this case, the capital protection option is diluted to that extent. In the 80-debt, 20-gold options model, the loss, if any, will take place in the gold portfolio. But, the initial investment is protected because of the high debt exposure.

In other Model, some Mutual Funds are planning to launch a product which will invest both in debt-oriented products and gold. The fund house plans to invest a minimum of 65 per cent in fixed-income securities. It will invest a fixed 10 per cent of the amount in gold, which will be increased to a maximum of 35 per cent.

But, remember that such products are meant for portfolio diversification and should not be part of your core portfolio. They are mostly a good hedge against sharp downslide in equities.

This hybrid product is highly in demand due to stock market resistance. Since now silver is more volatile than Gold, Certain financial institutions which develop hybrid structures have been working on a silver-based product and soon we will have Silver Linked debentures in market.

"COINS AND NOTES"

1. Facility for exchange of notes and coins at bank branches

All the designated bank branches provide facility for exchange of damaged/mutilated notes. All branches of banks in all parts of the country provide the following customer services, more actively and vigorously to the members of public so that there is no need for them to approach the RBI Regional Offices only for this purpose:

(i) meeting the demands for fresh / good quality notes and coins of all denominations,
(ii) exchanging soiled notes, and
(iii) accepting coins and notes either for transactions or exchange.

None of the bank branches / staff can refuse to accept small denomination notes and / or coins tendered at their counters.

A mutilated note is a note of which a portion is missing or which is composed of more than two pieces. Mutilated notes may be presented either at designated bank branches of commercial banks.

2. Reserve Bank of India (Note Refund) Rules, 2009 Delegation of full powers

(a) In terms of Section 28 read with Section 58 (2) of Reserve Bank of India Act, 1934, no person is entitled as a right to recover from the Government of India or RBI the value of any lost, stolen, mutilated or imperfect currency note of the GOI or banknote. However, with a view to mitigating the hardship to the public in genuine cases, RBI may, with the previous sanction of the Central Government, prescribe the conditions and limitations subject to which, the value of such currency notes or banknotes may be refunded as a matter of grace.

(b) With a view to extending the facility for the benefit and convenience of public, designated branches of banks have been delegated powers under Reserve Bank of India (Note Refund) Rules, 2009 for exchange of torn / mutilated / defective notes free of cost.

3. Liberalised definition of Cut Notes

 In order to facilitate quicker exchange facilities, the following types of soiled and cut notes are freely exchanged by all bank branches. They are also accepted over bank counters in payment of Government dues and for credit of accounts of the public maintained with banks.

a. Single numbered notes – Re.1/-, Rs.2/- & Rs.5/-

Note presented should not be in more than two pieces. No essential feature of the note should be missing. Both the pieces should be of the same note.

II. Double numbered notes–Rs.10/-,Rs.20/-,Rs.50/-,Rs.100/-,Rs.500/-& Rs.1000/-

The note presented should not be in more than two pieces. No essential feature of the note should be missing. Both the pieces should be of the same note. The above types of notes will be treated as soiled notes and be kept along with soiled notes.

4. Extremely brittle, burnt, charred, stuck up Notes

Notes which have turned extremely brittle or badly burnt, charred or inseparably stuck up together and, therefore, cannot withstand normal handling, will not be accepted by the branches for exchange. Instead, the holders should tender these notes to the concerned Issue Office where they will be adjudicated under a Special Procedure.

5. Notes bearing slogans / political messages, etc.

Any note with slogans and message of a political nature written across it ceases to be a legal tender and the claim on such a note will be rejected under Rule 6(3)(iii) of Reserve Bank of India (Note Refund) Rules, 2009 Similarly, notes which are disfigured may also be rejected under Rule 6(3)(iii) of Reserve Bank of India (Note Refund) Rules, 2009

6. Display of Notice Board

All designated bank branches are required to display at their branch premises, at a prominent place, a board indicating the availability of note exchange facility with the legend, "MUTILATED NOTES ARE ACCEPTED AND EXCHANGED HERE". The note exchange facility should not be cornered by private money changers / professional dealers in defective notes by the bank branches.

7. Withdrawn Coins

Aluminium coins of 5 paise, 10 paise, 20 paise, aluminum-bronze coins of 10 paise, stainless steel coins of 10 paise, cupronickel coins of 25 paise, 50 paise and rupee one denominations are being withdrawn and remitted to the mints, people may pack each of these denominations separately and also metal-wise with 100 coins in each sachet before they are tendered at the counters.

Effective Money Management

We hear so many management themes such as human recourse management, office management, business management etc. whatever may be the theme the core is to manage or control the things effectively. It includes steps to take effective and smooth going of things related to the theme. Here money management also includes planning and controlling your money matters such as fixing your financial goals, budgeting, avoid unnecessary expenditures, saving and investment, capacity to bear risk etc. etc. It requires taking decisions according to the current scenario, economic movement and considering the internal and external matters affecting money matters. When considering the management of money it includes both inflow and outflow of money in various forms and sources.

Money Management strategies

1) Always Ask for a Discount:

If it is not a fixed price store, there is a 70% chance that you will get a discount if you just ask for it. If you get a 10% discount, it is equivalent to earning an immediate 10% return on your money. Over the long term, you will save a huge amount that will accelerate you even faster towards your targeted net worth.

2) Always Ask for a ReceiptAlways get a receipt so that you can track every single expense at the end of the day and, if possible, claim it as a business expense and get a tax deduction.

3) At the End of the Day, Record all Expenses in your Daily Expense Sheet

4) At the End of the Month, Update Your Monthly Income Statement

At the end of every month, add up the total expenses from your daily expense sheet and update your monthly income statement. At the same time, update all your income for the month. Deduct your total expenses from your total income to get your monthly savings.

5) Make Budgets:

You need to make a budget and follow it unfailingly. Always purchase what you really need and never go out to the market without a purpose. You should make sure to save at least 10% of your monthly income in your bank account, and make your best efforts to increase this figure.

6) Shopping :

When you go out to the market, do not take extra cash with you and always leave your credit card back at home. If you do not have money, you will not be able to spend; it’s as simple as that. You should avoid impulsive shopping under any circumstance and if you think that you will not be able to control yourself, it is better to give your wallet to the person who is accompanying you to the market and tell him to stop you when you are shopping some unnecessary item.:)

It is not a surprise that money matters seemingly hit the young generation the hardest. This is because they do not have very good money management skills and they have a natural tendency to spend all that they can on latest gadgets and luxuries. One major factor that contributes to this is that getting loans has become very easy now-a-days. No matter what your needs are, try to avoid borrowing money unless there is an unavoidable emergency.

If you own a credit card, make sure to pay its bills regularly as credit card loans perhaps come with the highest interest rate.

You must use a system to track where every single rupee goes. Only when you know where your money is going, can you take steps to channel it to your savings and investments