FAQs

Question

Is Dividend based purging calculation correct

Answer

Under this method, the investor is liable to purge the impure income only if the company pays a dividend. In the event a company does not pay dividend in a particular year, the interest income of that year is not purged. Further, even otherwise, effectively it leads to purging of only a minor fraction (mostly, 5% to 10%) of the interest actually earned. Hence, there is no rationale for linking the purging to receipt of a dividend. In fact, as the dividend itself comprises only a small fraction of the top line (of which the interest income also is a part), by linking purging of the interest earned to the dividend, the purging effected is of a tiny fraction of the interest income for which a particular shareholder is responsible.

Moreover, the recipient of the dividend may not even be the holder of the shares during the period when the interest was earned. It is common knowledge that dividends for any specific period are generally declared by companies not during that period itself but after the concerned period has closed and the accounts for that period are prepared. Hence, dividends are generally paid out three to six months after closing of the accounting year of the company. At such point in time, it is very likely that the person holding the shares may be someone other than the person who had held the shares for the relevant period when the violation (of earning interest) occurred.

Furthermore, only the stated interest income can be purged, as this method considers only the stated interest income and fails to consider the “disguised” interest income which is often not stated as income in company accounts but as “dividend” (on preference shares or on units of liquid or interest-based mutual funds) or “profit on sale” (of interest-based securities).

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