Tax on IPO : Initial Public Offering

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 111ALTCG 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

FAQs

How much tax do you pay on an IPO?

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%.

Are IPO listing gains taxable?

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.

How can I save tax on gains from IPO Listing?

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 

Got Questions? Ask Away!

  1. Hi @FalconZex

    1. Yes you are right the tax payable shall be 10,000 INR
    2. Rebate is applicable on total tax liability Section 87A does not exclude any income specifically.
    3. In such a case no rebate shall be available. The tax rate shall be as under:
    • On business income of 2 lakhs INR: 5%

    • On STCG of 2 lakhs INR: 15%

    You can also refer to our Income Tax Calculator

  2. 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

  3. 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.

  4. 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?

  5. Yes, this 1 lac will not be taxable after deductions.

  6. 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

  7. 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

  8. 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?

  9. To differentiate capital gains into long term and short term the period is 36 months and 12 months - which one to consider?

  10. 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:

    • Take the equity value as on 31st Jan 2018 to be X
    • so LTCG = Sales price - value as on 31st Jan 2018
    • LTCG = 1,80,000 - X

    Any tax on LTCG will be 10% above INR 1 Lakh

    • LTCG below INR 1 Lakh is fully exempt
    • LTCG above INR 1 Lakh will be taxable at 10% for the amount above INR 1 Lakh only.

    Hope this helps!

    Refer to our learn article on LTCG on sale of Equity Shares and Equity Mutual funds

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