Important Keyword: Capital Gains, Income Tax, Tax on IPO.
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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.
The Indian IPO market continues to flourish, drawing in millions of retail investors seeking both short-term listing gains and long-term investment opportunities. However, with evolving tax laws and updated rates from recent Union Budgets, it is vital to understand the tax implications on IPO gains to avoid non-compliance and optimize post-tax returns.
This article offers an updated, in-depth overview of how income from IPOs is taxed in India, incorporating the latest changes introduced in Budget 2024 and 2025, including revised capital gains tax rates and exemption limits.
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.
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.
Capital Gains or Business Income?
Income from the sale of IPO shares is generally categorized as:
1. Capital Gains (Most Common for Retail Investors)
If the shares are held as an investment and sold occasionally, the profit is taxed under the head “Capital Gains”.
2. Business Income (For Active Traders)
If IPO shares are frequently traded as part of a business activity (e.g., high volume, speculative motive), the gains may be classified as “Business Income”, taxed at slab rates and subject to compliance like audit and bookkeeping.
Updated Tax Rates for IPO Gains (Post-Budget 2024–25)
Short-Term Capital Gains (STCG)
- Applicable When: Shares held for less than 12 months
- New Tax Rate (from July 23, 2024):
20% (increased from the previous rate of 15%) + applicable surcharge and cess
Long-Term Capital Gains (LTCG)
- Applicable When: Shares held for 12 months or more
- New Tax Rate (from July 23, 2024):
12.5% (revised from 10%) on gains exceeding ₹1.25 lakh
(Indexation benefit not allowed)
Revised Exemption Limit for LTCG:
- Old exemption: ₹1,00,000
- New exemption (from FY 2024–25): ₹1,25,000
Note: These rates apply only to listed equity shares sold through a recognized stock exchange with payment of Securities Transaction Tax (STT).
Examples to Illustrate Tax Calculation
Example 1: Short-Term IPO Gain
- IPO Allotment Price: ₹500
- Listing Day Sale Price: ₹700
- Holding Period: 1 day
- Gain per Share: ₹200
- Tax Rate: 20% + cess
- Tax Payable on ₹200: ₹40 + cess
Example 2: Long-Term IPO Gain
- IPO Allotment Price: ₹600
- Sale Price after 14 months: ₹900
- Gain per Share: ₹300
- Total Gain (e.g., 300 shares): ₹90,000
- Taxable LTCG: ₹0 (as total gain < ₹1.25 lakh exemption limit)
- Tax Payable: Nil
Treatment as Business Income
If IPO transactions are classified as business income:
- Gains are taxed at applicable slab rates (0% to 30% for individuals)
- All related expenses (brokerage, demat charges, subscriptions) can be claimed as deductions
- Books of accounts may need to be maintained
- Audit requirement may apply if turnover exceeds prescribed limits
Tip: Regular or large-volume IPO investments may lead to reclassification as business activity. Seek professional advice if unsure.
Loss Set-Off and Carry Forward (Latest Relaxation)
As per Budget 2025, the government has introduced a one-time relaxation:
- Long-Term Capital Losses (LTCL) incurred up to March 31, 2026, can be set off against Short-Term Capital Gains (STCG)—a move not permitted earlier.
This allows IPO investors facing losses from poor listings to offset them against gains from other shares, easing their tax burden.
Comparison Table: IPO Taxation Before & After Budget 2024
| Aspect | Before July 2024 | After July 23, 2024 |
|---|---|---|
| STCG Rate (Listed Shares) | 15% | 20% |
| LTCG Rate | 10% | 12.5% |
| LTCG Exemption Limit | ₹1,00,000 | ₹1,25,000 |
| Loss Set-Off (LTCL vs STCG) | Not allowed | Allowed (one-time, till AY 2026–27) |
| Indexation (LTCG) | Not applicable | Not applicable |
Pro Tax Tips for IPO Investors
- Hold shares for at least 12 months to benefit from lower LTCG tax.
- Track your exemption limit of ₹1.25 lakh before planning the sale.
- If IPO participation is frequent, evaluate if your gains should be reported as business income.
- Keep records: Maintain demat statements, contract notes, and tax calculations for each IPO.
- Utilize the one-time LTCL vs STCG set-off before it expires in FY 2025–26.
Recent Update: Reporting LTCG in ITR-1 and ITR-4
Until AY 2024–25, individuals with LTCG from equity shares were not allowed to use ITR-1 (Sahaj) or ITR-4 (Sugam). They had to opt for more complex forms like ITR-2 or ITR-3.
Latest Amendment (AY 2025–26):
The Income Tax Department has now allowed reporting of Long-Term Capital Gains (LTCG) from listed equity shares in ITR-1 and ITR-4, provided:
- The total LTCG does not exceed ₹1.25 lakh, and
- The LTCG is taxable at a concessional 12.5% rate (without indexation)
- STCG or business income from shares still cannot be reported in ITR-1/4.
✅ This amendment simplifies return filing for small retail investors with modest equity gains.
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/
