Important Keyword: Capital Gains, Income Tax, Tax on IPO.

Tax on IPO: Initial Public Offering

Enterprises are always on the lookout for avenues to expand and bolster their financial standing. One such avenue is the IPO, or Initial Public Offering. An IPO offers individual investors the chance to invest in a company during its early stages of becoming publicly traded. This presents investors with the prospect of benefiting from the company’s growth and success over time. However, the tax implications of an IPO can vary depending on several factors.

What is an IPO?

Initial Public Offerings (IPOs) represent the process of offering shares of a private company to the public in a new stock issuance. This move enables companies to secure capital from public investors, marking a significant transition from a private to a public entity. IPOs often present an opportune moment for private investors to realize gains from their investments, typically including share premiums. Simultaneously, they offer public investors the chance to partake in the offering. By going public, companies aim to raise funds for expansion and create awareness about their products and services. However, it’s essential for investors to comprehend the tax implications associated with IPOs.

Tax on IPO

Taxation on IPO Assessment of Capital Gain Tax on IPO Listing Under the Income Tax Act, income derived from the sale of securities is categorized as Capital Gains. The nature of the capital gain, whether Long-term or Short-term, and the corresponding tax rate hinge on the type of security and its holding period. Upon receiving equity shares of a company during its IPO listing, investors are not immediately subject to taxation. However, when they eventually sell these equity shares, capital gains ensue, and investors are liable to pay tax at the applicable rates on such gains.

In the case of listed securities, the holding period spans 12 months. Consequently, if a taxpayer receives equity shares through an IPO allotment and sells them within 12 months, it is regarded as a Short-term Capital Gain. Conversely, if the shares are sold after 12 months, it constitutes a Long-term Capital Gain.

Capital Gain = Sale Price – Issue Price

The tax treatment for the sale of shares acquired through IPO allotment mirrors that of listed equity shares.

Below is the tax treatment:

Resident taxpayers can leverage their status to adjust special rate income against the basic exemption limit, potentially reducing their tax burden. If their total taxable income falls below the basic exemption limit, they can offset special rate income against the shortfall, thereby only paying taxes on the remaining income.

Example of Tax on IPO Listing

Illustrative Example: Tax on IPO Listing Let’s consider Mr. A, who received 100 shares from Akash & Co.’s IPO allotment in 2024. On listing day, the equity shares’ issue price is INR 1000, with a market price of INR 1600.

Two scenarios arise:

Scenario 1: Mr. A sells the shares on the same day. Since the sale occurs within 12 months, it’s considered Short Term Capital Gain.

STCG = 100 shares * (1600 – 1000) = INR 60,000 Tax Liability = 15% * 60,000 = INR 9,000

Scenario 2: Mr. A sells the shares next year at INR 1400. As it’s sold after 12 months, it qualifies as Long Term Capital Gain.

LTCG = 100 shares * (1400 – 1000) = INR 40,000 Tax Liability = NIL (Exempt up to INR 1 lac)

Treatment of Loss on IPO Listing Losses incurred on the sale of listed equity shares vary based on the holding period:

STCL can offset both STCG and LTCG. LTCL can offset LTCG only. Remaining losses (STCL & LTCL) can be carried forward for 8 years to offset future Capital Gains.

Reporting IPO Listing Gains in ITR Taxpayers must report IPO share sale gains in ITR-2 or ITR-3 under Schedule CG. Details to be furnished include:

Full sales value Deductions under Section 48 Purchase value Transfer expenses These disclosures ensure accurate tax assessment on IPO-related gains.

Additionally, for Long Term Capital Gains arising from the sale of IPO shares, taxpayers need to furnish specific details in Schedule 112A of the ITR:

1. ISIN (International Securities Identification Number)
2. Name of the share or unit
3. Number of shares
4. Sales price per share or unit
5. Cost of Acquisition
6. Fair Market Value (FMV) as of 31/01/2018
7. Expenditure related to the transfer.

These particulars ensure comprehensive reporting for accurate tax assessment on Long Term Capital Gains from IPO share sales.

Read More: Section 54EE of Income Tax Act: Capital Gains Exemption on Investment in units of Specified Fund

Web Stories: Section 54EE of Income Tax Act: Capital Gains Exemption on Investment in units of Specified Fund

Official Income Tax Return filing website: https://incometaxindia.gov.in/