Here's how it works-

When a company announces dividends, investors holding the stock on the specified date are entitled to receive it. As soon as the company pays out the dividend, the stock is sold at a loss. This short-term capital loss is offset against capital gains from other sources.

This is essentially dividend stripping.

In order to deter short-term investors from rushing in before the record date and selling post dividend payment, there are measures which require investors to be in possession of the stocks 3 months before the record date and to be held for at least 3 months after the dividend payout. Unless the investors fulfill these conditions, they are not liable to claim the tax exemption.

Here's an example -

Adhiraj bought 10 shares of stock A in June 2018 at Rs. 100 per stock. In September, the stock issues a dividend of Rs.10 per stock.

In January 2019, he sees that the stock price has fallen to Rs. 90. Adhiraj sells his holdings and thus booking a loss of Rs. 100 which he can offset against gains made from other profitable investments.

Plus, he has now gained Rs.100 in tax-free dividends. Since he is bullish on the stock, he buys it again, thus taking advantage of Dividend stripping

As Bloom is a long-term investment product, Dividend Stripping works in its favor as most of the portfolio has a long-term investment horizon and our fund managers constantly look for opportunities to utilize this tax saving method.