An individual who sells the shares received in an IPO within 1 year of allotment will have to pay 15% of the total Gain minus the selling expenses as Short Term Capital gains Tax. On the other hand, if the individual sells the shares after 1 year then the Gain up to 1 lakh is exempted from any tax and the amount exceeding 1 lakh will be taxed as Long Term Capital gains tax at 10% of the overall Gain.
IPO (Initial Public Offering)-
An IPO is a process in which a company gets listed on the stock exchanges for the first time by taking money from the common public and the Institutions in exchange for some share of the company. Now if an individual is allotted the shares in the IPO then there is a tax implication for the seller of the shares once he/she sells those shares at a profit.
There are 2 types of taxes which is applicable on selling the shares post IPO -
- STCG (Short Term Capital Gains)
- LTCG(Long Term Capital Gains)
1. STCG (Short Term Capital Gain)
STCG or Short Term Capital Gains is a type of tax that is applicable for the individuals who sell the shares within 365 days or 1 year from the date of the IPO. The rate of STCG is 15% of the total gain earned. If the share capital is held for less than 12 months then It is considered as Short Term hence the name “Short Term Capital Gain” tax is implied. Short Term capital gains is taxed under Section 111A of the Income Tax act 1961.
To calculate the Short term Capital Gains tax- (Selling Price - Expenses for selling - Purchase Price)
2. LTCG (Long Term Capital gain)-
The Long Term Capital Gains is applicable for the individuals who sell the Shares at a Gain, after 1 year or 12 months from the date of the IPO. A profit up to 1,00,000 is exempted from any taxes, and only the profits exceeding 1,00,000 are taxes at the rate of 10%. The Long Term Capital Gains Tax is taxed under Section 112A of the Income Tax act.
Let’s Understand the above concept with an Example-
Let’s assume that Mr “A” got the allotment of 100 shares of TCS @ 2000 per share in the IPO. The IPO got listed at 3100.
- In the First Scenario Mr. A sold all the shares on the listing day itself at Rs 3100. In this case the total profit would be- (3100-2000) X 100 = Rs1,10,000. So Mr. A will be taxed on Rs 1,10,000 minus the selling expenses at the rate of 15% that will be shown in “Other Incomes” accordingly irrespective of the tax bracket he falls in.
- In the Second scenario Mr. A sells all the shares after 2 years at the rate of 3800 per share. Then the total Profit would be 1,80,000. In this case, the profit up to 1,00,000 is exempted and the remaining 80,000 will be taxable at the rate of 10%.
In this way, One will be taxed with respect to when does one sells the shares allotted the IPO. A tax has to be paid only if the shares were sold at a Profit, if the selling price is lower than the buying price then no Tax Implications fall upon the seller of the shares.