What is an IPO?
An initial public offering (IPO) refers to the process of 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.
An investor can apply for an IPO. On the day of listing of the company on the recognised stock exchange, the company initiates IPO allotment. If the investor receives shares under the IPO allotment, income tax would not be applicable. However, when the investor sells these shares, the tax treatment is the same as tax on sale of listed equity shares. Income on the sale of shares received under IPO allotment is treated as Capital Gains. Let us understand the tax treatment in detail.
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 LTCG or STCG 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 he/she sells them within 12 months, it is a Short Term Capital Gain. Further, if he/she sells 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||10% in excess of INR 1 lac under Section 112A|
|Short Term Capital Gain||Holding Period <= 12 months||15% under Section 111A|
Taxpayers holding the status of Resident as per the rules to determine the residential status can take benefit of 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 such as STCG u/s 111A, LTCG u/s 112A, etc. against the shortfall in the basic exemption limit and pay tax on the remaining income only.
Example of Tax on IPO Listing
Company XYZ announces an IPO. Mr. A receives 100 shares under the IPO allotment in 2022. On the day of listing, the issue price of equity share is INR 1000 and the market price is INR 1600. Let us assume two situations:
Mr. A sells these shares on the same day
Sale of shares within 12 months is a Short Term Capital Gain.
STCG = 100 shares * (1600 – 1000) = INR 60,000
Tax Liability = 15% * 60,000 = INR 9,000
Mr. A sells these shares next year at market price of INR 1400
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 lac)
Treatment of Loss on IPO Listing
The loss on sale of listed equity shares held for more than 12 months is a Long 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. Taxpayer 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:
- 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
- Capital Gain i.e. STCG or LTCG on shares is automatically computed
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 on 31/01/2018
- Expenditure related to transfer
When the investor receives shares under IPO allotment, there is no tax applicability. 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 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. He/she 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 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 the sale of 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