Initial Public Offerings (IPOs) offer an exciting investment opportunity as companies go public and invite investors to purchase shares for the first time. IPOs can yield impressive returns, making them an attractive choice for investors. However, any profit earned from selling IPO shares is subject to tax under the Income Tax Act, 1961. Knowing the tax implications associated with IPO investments helps investors make informed decisions, optimize tax liabilities, and maximize returns.
What is an IPO?
An initial public offering (IPO) refers to offering shares of a private company to the public in a new stock issuance. IPOs allow a company to raise capital from public investors. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes share premiums for current private investors. Meanwhile, it also allows public investors to participate in the offering. A company goes public to raise funds for its growth and expansion and create public awareness about its products and services. The investors must understand the provisions for income tax on IPO.
Tax on IPO
Calculation of Capital Gain Tax on IPO Listing
Income on the sale of securities is treated as Capital Gains under Income Tax. The type of capital gain whether Long-term Capital Gains or Short-term Capital Gains and the applicable tax rate depends upon the nature of security and its period of holding. When an investor receives equity shares of a company on its IPO listing, there is no tax applicability. However, when the investor sells these equity shares, capital gains arise and the investor must pay tax at applicable rates on such income.
The period of holding is 12 months in the case of listed securities. Thus, If a taxpayer receives equity shares on IPO allotment and sells them within 12 months, it is a Short-term Term Capital Gain. Further, if they sell them after 12 months, it is a Long-term Capital Gain.
Capital Gain = Sale Price – Issue Price
The tax treatment on the sale of shares received on IPO allotment is the same as the taxation of listed equity shares. Below is the tax treatment:
| Capital Gain | Period of Holding | Tax Rate |
| Long-Term Capital Gain | Holding Period > 12 months | 12.5% over INR 1.25 lac under Section 112A |
| Short-Term Capital Gain | Holding Period ≤ 12 months | 20% under Section 111A |
Taxpayers holding the status of Resident as per the rules to determine the residential status can benefit from adjusting the special rate income against the basic exemption limit to reduce taxes. Thus, if your total taxable income is less than the basic exemption limit, you can adjust your special rate income against the shortfall in the basic exemption limit and pay tax on the remaining income only.
Example of Tax on IPO Listing
Company Akash & Co. announces an IPO. Mr A received 100 shares under the IPO allotment in 2024. On the day of listing, the issue price of equity shares is INR 1000 and the market price is INR 1600. Let us assume two situations:
Mr A sells these shares on the same day
The sale of shares within 12 months is a Short Term Capital Gain.
STCG = 100 shares * (1600 – 1000) = INR 60,000
Tax Liability = 20% * 60,000 = INR 12,000
Mr A sells these shares next year at the market price of INR 1400
The sale of shares after 12 months is a Long Term Capital Gain.
LTCG = 100 shares * (1400 – 1000) = INR 40,000
Tax Liability = NIL (Exempt up to INR 1.25 lac)
Treatment of Loss on IPO Listing
The loss on the sale of listed equity shares held for more than 12 months is a Long-term Term Capital Loss. The loss on sale of listed equity shares held for up to 12 months is a Short Term Capital Loss. As per the income tax rules for set off and carry forward of losses:
- STCL can be set off against both STCG and LTCG
- LTCL can be set off against LTCG only
- The taxpayer can carry forward the remaining loss (STCL & LTCL) for 8 years and set off against future Capital Gains only
Reporting of IPO Listing Gains in ITR
The ITR Form under which the taxpayer needs to report income from capital gains includes ITR-2 and ITR-3. Taxpayers must report income from capital gains on the sale of IPO shares under Schedule CG of the ITR. The taxpayer must report the following details in Schedule CG in case of short-term Capital Gains:
- Full value of consideration i.e. sales value
- Deductions under Section 48
- Cost of acquisition i.e. purchase value
- Expenditure wholly and exclusively in connection with transfer i.e. transfer expenses
Further, in the case of Long Term Capital Gains on sale of IPO shares, the taxpayer must report the following details under Schedule 112A of the ITR:
- ISIN i.e. International Securities Identification Number
- Name of the share or unit
- Number of shares
- Sales price per share or unit
- Cost of Acquisition
- FMV i.e. Fair Market Value as of 31/01/2018
- Expenditure related to the transfer
FAQs
There is no tax applicability when the investor receives shares under IPO allotment. However, when the investor sells these shares, it is taxable as capital gains. LTCG on shares sold after 12 months is taxable at 10% in excess of INR 1 lac and STCG on shares sold within 12 months is taxable at 15%.
Yes. Gains on the sale of shares that investor receives under IPO allotment are taxable as capital gains. LTCG is taxable at 10% in excess of INR 1 lac and STCG is taxable at 15%. Further, the investor can set off the LTCL against LTCG and STCL against both STCG and LTCG. They can carry forward the loss for 8 years and set off against future capital gains.
Income on the sale of shares that an investor receives under IPO allotment is taxable as capital gains.
1. STCL i.e. short-term capital Loss on the sale of any capital asset can be adjusted against STCG and LTCG from the sale of IPO shares
2. If you’re a resident in India and other taxable incomes are less than INR 2.5 lacs, you can adjust the STCG and LTCG on selling IPO shares against the basic exemption limit and pay tax on the remaining amount only.
3. LTCG on sale of IPO shares can be saved either by claiming exemption from Section 54 to Section 54GB based on the nature of the capital asset
Hi @FalconZex
On business income of 2 lakhs INR: 5%
On STCG of 2 lakhs INR: 15%
You can also refer to our Income Tax Calculator
I have income Short Term and Long term Capital gains and “Income from other sources” (Bank interest and Dividend). Also, I have investments in 80C, 80D, 80CCD.
Are the investments in 80C, 80D, 80CCD considered for tax deduction?
For example if income from other source is 1 lac and 80C investment is 1lac, will this 1 lac be exempt?
STCG is 3.5lac, so 15% will be applicable on 1 lac. as 2.5 lacs is exempt.
so i pay tax only 15% of 1 lac which is Rs.15000.
please assist
Hey @Yasmin_Menon
Your are absolutely correct.
Deductions, if any, will be reduced from your Income taxable at slab rates.
The un-exhausted part of the basic exemption limit of 2.5 lakhs will be reduced from you Capital Gains.
So, in the above case you’ll have to pay 15% tax on 1 lakh.
However, if your taxable income after deductions is upto 5 lakhs, you’re eligible for rebate (12.5k) under section 87A.
Hope this helps.
Just to reconfirm,
income from other source (FD Interest and dividend) is 1 lac and 80C investment is 1lac, will this 1 lac be exempt and will not be calculated under taxable income?
Yes, this 1 lac will not be taxable after deductions.
Hey @Yasmin_Menon
Deductions under Chapter VI-A can be claimed against taxable incomes. Based on your data, here is a calculation:
Gross Total Income = 1 lac (IFOS) + 3.5 lac (STCG) = 4.5 lac
Deduction 80C = 1 lac
Total Income = 3.5 lac
Special Rate Income = 3.5 lac
Adjusted against basic exemption limit = 2.5 lac
Taxable Special Rate Income (STCG) = 1 lac
Tax on STCG = 15% of 1 lac = 15,000
Rebate u/s 87A = 12,500
Net Tax Liability = 2,500
Cess = 4% of 2,500 = 100
Total Tax Liability = 2,600
Hey @click2vikash
Here’s how you’ll be taxed under the Old Regime:
Total Income = 11 lacs
Income Taxable at Slab rates = 10 lacs
Income Taxable at Specified rates = 1 lakh
Tax on Slab Rate Income = 1,12,500
Tax on STCG = 15,000
Total Income Tax = 1,27,500
HEC = 5100
Total Tax Liability = 1,32,600
Hope this helps
I bought shares worth INR 70,000 in 2017 which are now worth around INR 1,80,000. It is long term capital gains, how much tax do I have to pay?
To differentiate capital gains into long term and short term the period is 36 months and 12 months - which one to consider?
Hey @Tanmay_mehta,
In Budget 2018, the grandfathering rule was announced u/s 112A which implies that - long term capital gains above INR 1 Lakh will be taxed at 10% after 1st Feb 2018.
Therefore to calculate LTCG:
Any tax on LTCG will be 10% above INR 1 Lakh
Hope this helps!
Refer to our learn article on LTCG on sale of Equity Shares and Equity Mutual funds