Recently, we all witnessed a rise in the IPO listings of many well known and popular companies. Many IPOs got listed at a premium, and some investors sold their allotments immediately to earn quick profits in the initial days of listing. Some IPOs perform well, whereas some doom as against expectations of the investors.
As an investor, you should know that the tax applicability on these newly listed shares is no different from the other normal shares. IPO listed shares will have similar taxability as other stock market investments. Let us see how the gains on these holdings will be taxed.
According to the Income Tax Act, if shares allotted in an IPO are sold within the holding period of 12 months, the realised gain or loss will be taxable as short-term capital gains or loss. Short-term capital gain is taxable at 15% plus education and higher education cess.
On the contrary, if the investor sells the IPO allotment shares after 12 months of holding, the realised gain or loss will become taxable as long-term capital gain or loss. Long-term capital gain is taxable at 10% exceeding Rs.1 lakh. Therefore, if you have sold the IPO allotments immediately on the listing, their holding period would be less than 12 months and hence would become taxable as short-term capital gains at the rate of 15%. If you sell them after one year, then long-term gains will be taxable at 10% on amounts exceeding Rs.1 lakh.
A taxpayer will be required to report the capital gain and loss in the income tax return. An individual can file ITR-2 or -3 if there is capital gains income. Remember, ITR-1 and ITR-4 simplified returns cannot be filed if there is capital gains income.
Short-term capital loss can be set off against short term as well as long-term capital gains. In contrast, the long-term capital loss can be set off only against long-term capital gains. Also, any unabsorbed amount of short term or long-term capital loss can be carried forward for eight assessment years. A person must file the return within the original due date to claim the set-off and carry-forward provisions.
For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in
I am a Chartered Accountant by profession with 4+ years of experience in the finance domain. I consider myself as someone who yearns to explore the world through travelling & Reading. I believe, the knowledge & wisdom that reading gives has helped me shape my perspective towards life, career and relationships. I enjoy meeting new people & learning about their lives & backgrounds. My mantra is to find inspiration from everyday life & thrive to be better each day.
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