Tax Implications on Income from IPO Gains

A new buzzword in the world of security investment is IPO. Initial public offer or popularly called IPO, is the process whereby the shares of a private limited company is sold in the market, open to public investors for the first time. When the shares are sold for the first time in the market, it is termed as the primary market. Listing gains from IPO are taxed at 20% in case of Short-Term Capital Gains and 12.5% in case of Long-Term Capital Gains. In this article, we will understand the tax implications on listing gains from an IPO.

How IPOs Are Taxed - Key Considerations

The capital gain implications of an IPO are similar to those of the capital gain taxation of shares, which varies according to the period of holding and listing status.

Key points to be considered for the transfer of shares acquired in case of an IPO:

1. Period of holding: Capital gain implications vary accordingly, so does the exemption availability.
2. Security type: There can be IPOs for equity shares or debt securities. Capital gain implications vary accordingly.
3. Payment of STT in case of equity share transfer.
4. Date of transfer

Understanding Capital Gains Tax on IPO Investments

Capital gain implications on the sale of listed equity shares floated as IPO are as follows:

1. Holding period: If the shares are held for a period exceeding 12 months, they are considered a Long-Term Capital Asset, the eventual transfer of which will result in Long-Term Capital Gains. This means that even when held for a period equal to 12 months, they are still a Short-Term Capital Asset.
2. Rate: The rate determination depends on the date of transfer.

 Note: In any of the above cases, indexation benefit is not available.

Is that Necessary to pay Capital Gains tax on Subscription?

• It is to be noted that no tax implications arise at the time of subscription or purchase of IPOs in the hands of the investor. 
• The very nature of capital gains taxation is that it arises at the time of sale/ transfer.

Taxation of Stock Options and Employee Equity in IPOs

• In the case of employee stock options given at the time of IPO, the capital gains provisions do not differ per se, but a few details are to be looked into regarding the date of acquisition, and period of holding.
• The date of exercising the option becomes the date of acquisition, using which the period of holding is calculated.
• Also, when purchasing ESOPs, employees receive the shares at a concessional rate compared to the market price. Since this concessional amount results from employment, it is treated as perquisites under salary in the year of acquisition. 
• On sale, depending on the period of holding, the profits on sale is treated as capital gains. The tax implications might differ based on period of holding as described above.

Strategies to Minimize tax after IPOs

1. The holding period can be extended to greater than 24 months so that it becomes a Long-term capital gain, for which tax is lesser than Short-Term Capital Gains. Also, an exemption of Rs.1.25 lakh is available in such cases.
2. In the case of the sale of listed equity shares or equity-oriented funds acquired before 01-02-2018, grandfathering provisions become applicable. In such instances, the fair market value as of 31.01.2018 can be claimed as the cost of acquisition if it is beneficial. In any case, the deduction claimed shall not exceed the sale value of shares.
3. The set-off of long-term capital losses is available only against LTCG u/s 112A. However, short-term capital losses can be set-off against LTCG and STCG. The above provisions are the same in case of inter-head adjustments or set-off of carried forwarded losses in the current year.
4. In the case of individuals and HUFs, when total income minus long-term capital gains falls below the basic exemption limit, the figure (Basic exemption limit)—(total income minus LTCG) can be claimed as a deduction. This is called exhaustion of the basic exemption limit.

Common Mistakes to Avoid during an IPO

1. Make sure you choose appropriate ITR form. Incorrect ITR form may result in defective returns.
2. Verify whether capital gains are as per the figures mentioned in the Annual Information Statement.
3. Apart from mistakes that result in tax implications, it is generally better to do proper research and invest and do fundamental analysis before investing instead of following the trend.