Your Taxes

Can you please explain the dividend stripping provisions in the Income Tax Act.

Sudhin Bathija

As per section 94(7) of the Income-Tax Act, loss (up to the amount of dividend/income earned on the security/unit) arising on account of purchase and sale of any security/unit, shall not be allowed in case all the following conditions are satisfied:

The security/unit is purchased within a period of three months prior to the record date;

The security is sold within a period of three months (nine months in case of unit) after the record date;

Dividend or income on such security/unit is exempt.

It is generally seen that post-declaration/distribution of dividend by a company, the market price of its shares goes down approximately to the extent of the dividend income. Thus, a shareholder who purchases a share near the record date of the dividend and sells it immediately after such record date is likely to incur a loss on such sale.

Since such loss is likely to be on account of the exempt dividend income, which the shareholder has already earned, the dividend stripping provisions have been introduced in order to curb the practice of claiming such losses.

I am staying in my own house constructed in 1994, for which I am claiming income tax relief on housing loan interest and principal. I propose to purchase a flat/houseby availing a housing loan. I expect that the annual interest on the loan taken on this new property to be more than the annual rental income from it . Can I claim deduction of such housing loan interest from the rental income of the new property and my salary income?

Gregory Mathew

As per section 24 , in case of a let-out property, actual interest payable is allowed as a deduction while computing income under the head ‘House Property’.

Further, in case there is a loss under the head, ‘House Property’, owing to excess interest on the housing loan over and above the rental income from the property, such loss can be set off from income arising under any other head, including salary income. Loss under the head, ‘House Property’, which cannot be set off during the current financial year, can be carried forward for the next eight financial years and can be set off against income under the head, ‘House Property’, in such subsequent financial years.

Accordingly, you may claim deduction of housing loan interest payable by you on let-out property from your rental income and salary and carry forward the remaining loss to subsequent years to set off as per the provisions of the Act.

The writer is a practising chartered accountant. Send your queries to >taxtalk@thehindu.co.in

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