What is Dividend Stripping

Imagine a situation where a investor would buy MF units just before the record date of a MF dividend , pockets the dividend and then sell the unit at a loss , thus showing it as a capital loss and then tries to adjust the capital loss with some other capital gains is known as dividend stripping .

Let me give you an example , suppose you bought some units of MF at an NAV of Rs.25 , after few days , the AMC annouces a dividend payout of Rs.3 per unit . So on the date the dividends are paid out to you the NAV of the scheme gets adjusted to Rs.22 ( 25-3 ) . Now, if you look just at the NAV , yes you are in a loss , but since dividends have already been credited to your account you are actually not at a loss .
Also note here that in case of Equity MFs , dividend is totally tax free in the hands of the Investor

Government figured this loop hole , and bought a fix for this and this is the fix
If an investor buys MF units within THREE months prior to the record date of a dividend, and then sells those MF units within NINE months after the record date, any capital loss from the transaction would not be allowed to be set off against other capital gains of the investor, up to the value of the dividend income exempted.