December 04, 2023 6918
Investing in initial public offerings (IPOs) can be an exciting opportunity to make significant gains. Recently, Tata Technologies and Indian Renewable Energy Development Agency (IREDA) witnessed massive listing gains, creating a buzz in the market. However, it's essential to understand the tax implications of these gains, especially if you exit the stock after making a profit on the listing day.
Short-Term Capital Gains Tax on Listing Day Profits
When you sell shares within a year of being allotted, the profits from the share sale are considered short-term capital gains and are subject to taxation. For IPO shares, such as those of Tata Technologies and IREDA, the tax rate for short-term capital gains is 15%, plus education and higher education cess. However, the taxation of these shares can vary based on the buying circumstances.
Taxation of Equity Shares
If you hold the IPO shares for one year or beyond, the tax rate for the gains is reduced to 10%. This means that Tata Technologies shares purchased during the IPO would turn into long-term investments by November 29, 2024. It's important to note that unlisted shares are considered long-term only after being held for three years.
Tax Exemptions for Low-Income Earners
Many senior citizens and low-income earners applied for the Tata Technologies and IREDA IPOs. Under the current tax rules, the basic exemption limit for income tax is Rs 2.5 lakh for ordinary citizens, Rs 3 lakh for senior citizens (60-80 years), and Rs 5 lakh for extremely elderly individuals (80 years and beyond). If your income is below these limits, you do not have to pay any income tax on the sale of your shares.
It's worth mentioning that non-resident Indians cannot adjust the basic exemption against their gains.
Deductible Expenses to Reduce Tax Liability
The good news is that you can deduct certain charges and losses to reduce your overall tax liability on the profit amount. For individual investors, the application money for IPO shares is not taxable as income.
You can also deduct the brokerage paid from the profit for taxation purposes. Additionally, if you have incurred a loss while selling any other asset, you can adjust that loss against the IPO profit.
Adjusting Capital Losses
If you have incurred any other capital losses during the year through share sales or selling any other capital assets, you can adjust those losses against the short-term capital gains made on Tata Technologies and IREDA shares. This adjustment is possible for short-term capital losses made between April and November 2023.
However, it's important to note that long-term losses can only be adjusted against long-term profits.
Benefits of Holding Assets for One Year or More
Apart from the reduced tax rate, there are additional benefits to holding assets for one year or more. One significant benefit is that profits up to Rs 1 lakh are exempt from taxes if you hold the assets for one year or more. This exemption is not available if you sell within a year, which means that short-term capital gains would be charged on every penny earned if you sell on the listing day.
Tax Implications of Investing in IPOs with Borrowed Capital
If you frequently invest in IPOs using loans, the income tax implications change. If it is established that you borrow money to invest in IPOs, the income tax department can claim that the gains are considered business income. In such cases, the tax applicable on the share sale will be as per your tax slab and not the short-term capital gains rate of 15%.
To avoid being caught in this situation, it's crucial to declare your trading or investment activities as a business if you have been filing returns. In this case, you can deduct the interest paid for borrowing money to invest in an IPO (up to the date of allotment) as an expense from the gains.
However, adjusting any capital losses in this circumstance can be tricky, as they cannot be set off against business income.
Filing Tax Returns and Deadlines
To claim all the benefits of deducting expenses from IPO gains, it's essential to file your tax returns on time. The deadline for filing tax returns is usually July 31 each year. Additionally, if you have capital gains to declare and adjust, you cannot use the simple tax return forms ITR-1 and ITR-4.
It's important to stay informed about tax regulations and consult a tax professional for personalized advice based on your specific circumstances.
Always remember to pay your taxes on time to avoid penalties and remain compliant with tax laws.
Conclusion
Investing in IPOs like Tata Technologies and IREDA can be a lucrative opportunity, but it's essential to understand the tax implications of the gains made on the listing day. Short-term capital gains are subject to taxation at a rate of 15%, while long-term gains are taxed at a lower rate of 10%. Deductible expenses and the adjustment of capital losses can help reduce your overall tax liability. Additionally, holding assets for one year or more provides additional tax benefits. However, if you invest in IPOs using borrowed capital, the income tax implications change. It's crucial to file your tax returns on time and seek professional advice to navigate the complexities of taxation. By staying informed and compliant with tax laws, you can make the most of your IPO investments while fulfilling your tax obligations.