Taxman puts mutual fund houses, HNIs on watch over past dividend stripping:

Starting 1st April , for dividends paid to mutual fund investors who have opted to be in the dividend plans, the fund houses will have to disclose to every investor how much of the dividend is from appreciation on net asset value and how much from capital distribution.
This change in norm, announced by Securities and Exchange Board of India in October, was meant to discourage fund houses from indulging in dividend stripping that was being used by high networth investors to evade tax.
Mutual funds sometimes used a small-sized scheme to facilitate the method of dividend stripping. MFs wants more AUM to earn profits and by helping HNIs they can get more funds. MFs help the HNIs by paying huge amount of dividend from principal amount so that NAV would drop and they can book huge capital losses and evade taxes. The investments needed to be introduced in three months earlier than the dividend cost and needed to be held 9 months after the date for them to be eligible for taxation advantages.
This practice died out as the government and subsequently, the capital markets regulator modified the tax legal guidelines and guidelines.
The government plugged the loophole within the FY21 funds, making dividends taxable within the arms of buyers. Until then, the dividend payer paid the taxes. This has made dividend stripping unsuitable for decreasing tax outgo.
In July 2010, the Supreme Court dismissed the tax department’s petition against a Bombay HC ruling that the loss incurred by assessees in dividend stripping transactions cannot be disallowed on the ground that it was tax planning.