Tax Treatment Of Listing Gains From An IPO

What is an IPO?

An IPO or an Initial Public offering refers to the shares offered by a company to the public for the issuance of new stock. IPOs are offered with the aim of raising capital from the public. This is an integral way for companies to transform from private to public. It also opens the opportunity for public investors to join the offering. Companies go public to raise funds for growth, expand their reach, and increase awareness of their products and services.

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Taxation on IPO Listing Gains

Income from the sale of securities is treated as capital gains under the Income Tax Act. The taxation on IPO listings depends on the nature of capital gains, whether short-term capital gains or long-term capital gains. It also depends on the holding period of the securities.

For example, if the shares received upon listing are held for a period of less than 12 months, they are considered short-term capital gains, and if the holding period is more than 12 months, they are considered long-term capital gains. Let’s understand it in detail.

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Short-term or Long Term Capital Gain?

Gains made on stocks (equities) are categorized as long-term or short-term capital gains, which form the basis for their taxation.

Let’s understand this with the help of an example -

Suppose you applied for 20 shares of Nykaa at Rs.1125 each, and the same got listed at Rs 2018. If you sold the shares on listing after allotment, your gain is Rs 17860. This is considered capital gain as per Income Tax Law.

In our case, as the shares were sold on the listing, your gain of Rs 17860 is considered short-term capital gain and taxed at 20%(cess+ surcharge(if any)

So you will be liable to pay 20% * 17860 = Rs.3572 as short-term capital gains tax [excluding Cess and Surcharge]. Please note that the benefit of the basic exemption limit will be applicable in case the taxpayer does not have any other income.

Similarly, if you sell the shares after holding them for a period of more than 12 months, it will be considered long-term capital gain and will be taxed at 12.5% if the amount of gain exceeds Rs 1.25 lakhs. In this case, since the capital gains are less than Rs 1.25 lakhs, the entire amount will be exempt from tax. In addition to this, the indexation benefit, which was earlier available on long-term capital gains has been removed wef 23rd July 2024, after Budget 2024.

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Setting Off Of Short-Term Capital Gain Against Capital Loss

If you have any short-term capital loss, you can set it off against short-term/long-term capital gain. But the same cannot be done for long-term capital loss. That will have to be set off only against long-term capital gain.

If you are unable to set off the loss this year, you may carry it forward for a period of 8 years provided your Income-tax return is filed this year.

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What is the Treatment of Loss on IPO Listing?

The disposal of listed equity shares kept for over 12 months results in a long-term capital loss, while those held for up to 12 months incur a Short-term Capital loss. According to income tax regulations regarding the utilization and retention of losses:

• Short-term Capital loss (STCL) is eligible for offset against both short-term capital gains (STCG) and long-term capital gains (LTCG).
• Long-term Capital loss (LTCL) can only be offset against long-term capital gains (LTCG).
• Any remaining loss, whether STCL or LTCL, can be carried forward by the taxpayer for up to 8 years to offset against future Capital Gains exclusively.

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How to Report IPO Listing Gains in ITR?

The taxpayer must use either ITR-2 or ITR-3 to report income from capital gains. Income from the sale of IPO shares should be reported in Schedule CG of the Income Tax Return (ITR). In this schedule, the taxpayer needs to provide:

• The total sales value (full value of consideration).
• Deductions under Section 48.
• Purchase value (cost of acquisition).
• Transfer expenses (expenditure wholly and exclusively related to transfer).
• Capital gains on shares, whether Short-term Capital gains (STCG) or long-term capital gains (LTCG), are automatically calculated.

Moreover, if there are Long Term Capital Gains from the sale of IPO shares, additional details must be provided under Schedule 112A of the ITR, including:

• International Securities Identification Number (ISIN).
• Name of the share or unit.
• Number of shares sold.
• Sales price per share or unit.
• Cost of acquisition.
• Fair Market Value (FMV)
• Expenditure related to the transfer.

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Tax Treatment of ESOPs and Employee Shares in an IPO

The tax rules for shares acquired through Employee Stock Option Plans (ESOPs) are broadly similar to those applicable to other shares. However, determining the acquisition date and holding period requires special attention.

For ESOPs, the date on which the employee exercises the option is considered the date of acquisition. This date is used to calculate whether the resulting gain qualifies as short-term or long-term capital gain when the shares are sold.

Employees often purchase ESOP shares at a price lower than the prevailing market value. The difference between the fair market value and the exercise price is treated as a taxable perquisite and taxed as salary income in the year the option is exercised.

When the shares are eventually sold, any profit or loss is taxed under the capital gains provisions. The applicable tax rate depends on how long the shares were held after acquisition.

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How to Minimize Tax on IPO Capital Gains

Investors may be able to lower their tax liability on IPO gains through proper tax planning. One common approach is to hold listed shares for more than 12 months before selling them. In such cases, the gains qualify as long-term capital gains (LTCG), which are taxed at a lower rate than short-term capital gains. Additionally, LTCG on listed equity shares up to ₹1.25 lakh in a financial year is exempt from tax.

Taxpayers can also use capital losses to reduce their taxable gains. Short-term capital losses can be adjusted against both short-term and long-term capital gains, while long-term capital losses can be set off only against long-term capital gains. Unused losses may be carried forward to future years, subject to the prescribed conditions.

For resident individuals and HUFs, another benefit may be available if their taxable income (excluding LTCG) is below the basic exemption limit. In such cases, the unutilized portion of the exemption limit can be adjusted against taxable long-term capital gains, thereby reducing the tax payable.

For shares covered under the grandfathering provisions, the cost of acquisition may be determined using the fair market value as on 31 January 2018, wherever applicable and beneficial under the Income-tax Act.

Are you confused about how to report IPO listing gains in ITR? Don’t get intimidated by complex tax laws, and consult our tax experts to get tax advice tailored to your needs. Book Tax Consultation Now!

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