Due to more awareness via social media, newspaper and news channels, IPOs receive much attention. Good IPOs receive a heavy subscription. India’s primary market has been growing over the recent years. Nowadays, subscribing to a single lot is just one click away.
After allotment, exiting an Initial Public Offering (IPO) with listing gains has proven to be a sound strategy for the investors. Over the past year, many stocks had managed to nearly double investor money when they bought the shares through the IPO and sold them on the day of the listing. It has proven to be a good plan for investors to exit an IPO after allotment with a strong listing gain. Investors earn a considerable amount of profit within a short time.
But do you know the tax implication of such profit? Here is how you will have to pay the tax.
Let us assume the XYZ companies’ IPO issue price is Rs 1,000, and the share price is Rs 1,580 on a listing day. On allotment of shares, you earn Rs 580 per share on the selling of shares on a listing day.
The tax on the gain of the sale of shares depends on the share-holding period. If the investor sells their shares within a year of listing and earns profit, such profit is a short-term capital gain. If the investor sells the shares after one year of purchase, the gain on sale of such shares is qualified as a long-term capital gain.
The taxability of short-term capital gains and long-term capital gains is different. The holding period of shares sold on a listing day is less than one year. If there is a listing gain, it will be a short-term capital gain.
The short-term capital gain will be taxed at 15 per cent if you sell the shares through the recognised stock exchange and pay the Securities Transaction Tax (STT). There will be a 15% tax on such short-term capital gain as per the Income Tax Act.
So, let us calculate tax on the example mentioned above:
- No. of shares sold, say: 14
- Issue Price per share: Rs 1,000
- The purchase cost of the shares sold: Rs 14,000
- Sale price per share: Rs 1,580
- Total Sale Value (Rs 1,580 x 14): Rs 22,120
- Short-term capital gain: Rs 8,120
- Tax @ 15%: Rs 1,218
- Cess @ 4% (Rs 1,218 x 4%): Rs 48.72
Hence, the tax liability on the short term capital gain is Rs 1,270 (rounded off).
After one year, if you sell these shares, then the gain on such shares will be long-term capital gain. You have to pay tax at 10 per cent if the long-term capital gain (without indexation) exceeds Rs 1 lakh during the fiscal year.
However, if the taxpayer has incurred any short-term capital loss on the sale of any asset, he can reduce his tax liability by adjusting the short-term capital loss of any asset. But the Income Tax Act does not allow a set-off of long-term capital losses with short-term capital gains.
However, if you have earned long-term capital gain during the year from the sale of any asset, you can adjust the gain with short-term capital losses and long-term capital losses incurred on the sale of any asset during the year.
The Income Tax Act allows the taxpayers to set off the capital gains with the capital loss incurred in the current year.
You can set off the short-term capital gain from the short-term capital loss of the current and the previous year’s short-term capital loss if any.
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