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Majesco's mega dividend announcement: What should investors do?

This amount is added to your total income and taxed at your slab. For those in the higher brackets, the rate of tax is in the range of 30-40 percent

December 18, 2020 / 10:49 AM IST

Majesco, a listed information technology company, announced a dividend payout of a whopping Rs 974 on December 15. At a share price of around Rs 970, the dividend payout of nearly 100 percent, seems extremely attractive. A large dividend income also attracts tax. Is there a way to avoid a large tax payout? Should you buy shares just before large dividend announcements?

Why such huge dividend payout?

Dividends paid by Majesco in recent years hovered in the range of Re 1 to Rs 2 per share. However, the company decided to sell the business. The sale proceeds after accounting for expenses and capital gains tax, led to cash accumulation of Rs 1028 per share in its books. The company had already completed a buy-back of shares at Rs 845 per share. Majesco decided to pay a special dividend of Rs 974 per share on December 15, 2020.  The company has announced that the record date for the dividend payout will be made on December 25, 2020 and the ex-date would be December 23, 2020.

As per the information shared in the notice to the stock exchanges, the company has specified that there will be a cash balance of Rs 103 crore and some real estate after completing the distribution of special dividend. The company plans to sell the real estate and distribute the cash to shareholders. The company may go for delisting after that. “The company sold its business and since the monetization of real estate may take some time, there is no clarity on the quantum and the timelines of cash distribution, there is no strong fundamental reason why an investor should stay invested in this company or buy the share,” says Abhimanyu Sofat, Head of Research, IIFL Securities.


Why dividend stripping does not make sense

Due to the high dividend payout and the fact that the share price falls in line with the amount paid, experts estimate the share price to quote in single-digit after it goes ex-dividend.

Dividends in excess of Rs 5,000 are subject to tax deduction at source (TDS), at the rate of 7.5 percent. This amount is added to your total income and taxed at your slab. For those in the higher tax brackets, the rate of tax is in the range of 30 to 40 per cent and surcharge.

For those who might be keen to pocket this dividend, but don’t hold the shares, it may be too late to buy now. This is called dividend stripping. This means, you buy a stock before the dividend, pocket the dividend and sell the shares at ex-dividend price. The fall in share price entitles you to claim a loss, which you can set off against capital gains earned in some other transaction.

Also read: Budget 2020: Government says scrapping of DDT to encourage investment in capital markets

But dividend stripping laws have been tightened over the years. “To curb the revenue loss from dividend stripping, section 94(7) of income tax law restricts a person from setting off any short term capital loss (to the extent of dividend income) arising from sale of shares purchased for dividend stripping. This is applicable when the underlying shares are bought within three months prior to the record date of the dividend, or sold within three months after this date,” says Akhil Chandna, Associate Partner, Grant Thornton India LLP.

So, to claim a loss, you have to buy the shares at least three months prior to the record date and sell them three months after the record date.

Ignore the dividend, sell the shares

For most investors, it is highly likely that the dividends will be taxed at a relatively higher rate.

A better way is to just sell the shares right away, before December 22, 2020 the last day before the stock starts quoting at the ex-dividend price. If you sell the stock, you will book capital gains. The gains from Majeco stocks bought and sold within a year will be taxed at 15 percent rate. Shares held for more than a year will result in gains being treated as long term. They will be taxed at 10 percent if such long term capital gains exceed Rs 1 lakh in a year. But this would still be lower than the dividend taxed in your hands at rates greater than 30 percent, if you fall in the higher slabs.

“Individual investors falling in the higher tax brackets should not go for dividend stripping at all. As a shareholder is required to pay tax on dividend, no adjustment is required to be done for dividend stripping,” says Mihir Tanna, Associate Director, SK Patodia and Associates.
Nikhil Walavalkar
first published: Dec 18, 2020 10:14 am

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