An IPO or Initial Public offering means the shares made available by a company to the public for the issue of fresh stock. IPOs are presented with the goal of raising money from the public. It is a fundamental means by which companies convert from being private to being public and their shares are avilable on stock exchange for trade. It also provides for public investors to participate in the offering. Firms become public to raise capital for expansion, gain wider coverage, and create awareness of their products and services.
Tax on Income from IPO Gains?
If you hold any shares before the company’s shares are listed in the stock exchange for IPO then it will not treated as a sale of securities. It is only the conversion of private stock to listed company stock.
However, Income arising from the sale of securities shall be is considered as capital gains for the purposes of the Income Tax Act.
Capital Gain is generally computed as follows
| Capital Gain Formula |
| Sale Value of Stock |
| Less: Cost of Purchasing Stock |
| Less: Brokerage & STT Paid |
| Capital Gain |
Capital Gain Tax can be 10%, 15% or 20% based on various factors such as short term- long term, listed-unlisted stock, STT paid or not, which we will explain below.
Taxation of IPO listings varies according to the nature of capital gains, either short-term capital gains or long-term capital gains. It also varies according to the holding period of the securities.
For Example, if the listed shares received on listing are held for a duration of less than 12 months, they are treated as short-term capital gains, and if the holding time is greater than 12 months, they are treated as long-term capital gains. Let’s get it in detail.
Tax On Short-Term Vs Long-Term Gain?
Profits earned on stocks (equities) are either long-term or short-term capital gains, and these are the foundation for taxing them.
| Asset Type | Holding Period for LTCG | LTCG Tax Rate | STCG Tax Rate |
| Listed Equity Shares | > 12 months | 12.5% on gains exceeding ₹1.25 lakh; no indexation | 20% |
| Listed Equity Mutual Funds | > 12 months | 12.5% on gains exceeding ₹1.25 lakh; no indexation | 20% |
| Listed Tax-Free Bonds | > 12 months | 12.5%; no indexation
(interest income is tax-exempt) |
Taxed as per individual income tax slab rates |
| Listed Debentures | > 12 months | 12.5%; no indexation | Taxed as per individual income tax slab rates |
| Unlisted Shares | > 24 months | 12.5%; no indexation | Taxed as per individual income tax slab rates |
Setting-off of short-term capital Gain Against Capital Loss
Short-term capital loss, if you have any, can be set off against short-term/long-term capital gain. But not the same with long-term capital loss. That will have to be set off only against long-term capital gain.
If you cannot offset the loss this year, you can carry it forward for 8 years subject to the condition that your Income-tax return is filed this year.
What is Treatment of Loss on Sale of Share in IPO Listing?
The sale of listed equity shares held for more than 12 months leads to a Long-term capital loss, while shares held for 12 months or less accrue a Short-term Capital loss. As per income tax laws relating to the use and carry forward of losses:
- Short-term Capital loss (STCL) can be set off against both short-term capital gains (STCG) and long-term capital gains (LTCG).
- Long-term Capital loss (LTCL) is available to be offset only against long-term capital gains (LTCG).
- Any other loss, STCL or LTCL, may be brought forward by the assessee for 8 years to set off against future Capital Gains only.
How to report IPO listing Capital Gains in ITR filing?
The taxpayer is required to report income from capital gains in either ITR-2 or ITR-3. Income from the sale of shares of an IPO should be reported in Schedule CG of the Income Tax Return (ITR). In the schedule, the taxpayer is required to furnish:
- The total value of sales (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, either Short-term Capital gains (STCG) or long-term capital gains (LTCG), are calculated automatically.
Additionally, if there are Long Term Capital Gains from the sale of IPO shares, further details need to be furnished 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) as of January 31, 2018.
- Expenses associated with the transfer.
Moreover, If you want any other guidance relating to quick commerce business or GST registration, Income tax filing, please feel free to talk to our business advisors at 8881-069-069.
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