India leads global IPOs, raising $4.3 bn in Q3 2024: Tax impact decoded

Tax implications on IPO gains depend on holding periods, with short-term gains taxed at 20% and long-term gains exceeding Rs 1.25 lakh taxed at 12.5%.

India has taken the lead in the global IPO landscape, with a 36% share of total listings in the third quarter of 2024, even surpassing the United States, which held a 13% share.

 

 India recorded the highest quarterly listings in the third quarter over the past 20 years, according to a report by Ernst & Young India. The main market recorded 27 IPOs showing a 29% increase from Q3 2023, raising $4,285 million (Rs 36,027 crore), a  142% increase from the year-ago period. When compared to the last quarter, Q3 saw a 115% increase in funds raised and a 108% rise in the number of deals.

 

 

Prominent IPOs of the quarter included Bajaj Housing Finance, Ola Electric Mobility and First Cry, the report said. 

 

“The average listing gain on listing of SME IPOs in 2019 was around 2 per cent, which has increased to 74 per cent in 2024. Listing gains of mainboard IPOs reached their highest level in 2020 and have been range bound around 30 per cent since then,” it added.

 

While IPOs continue to bring substantial returns to investors, many overlook the important tax implications that can significantly affect their net profits.  According to Cleartax, the taxation of IPO gains depends on the holding period of the shares—whether the profits qualify as short-term capital gains (STCG) or long-term capital gains (LTCG).

 

Short-Term Capital Gains (STCG): If shares are sold within 12 months of the IPO allotment, the profits are considered short-term capital gains and are taxed at a rate of 20% plus cess.

 

Long-Term Capital Gains (LTCG): If the shares are held for more than one year, any capital gains up to Rs 1.25 lakh are tax-free. For gains exceeding this threshold, the tax rate is 12.5% plus cess.

 

CA Abhishek Soni explains the taxation process with the help of an example: 

Suppose you applied for 20 shares of Nykaa at Rs 1125 each, and the same got listed at Rs 2018. If you sold the shares on listing after allotment, your gain is Rs 17,860. This is considered capital gain as per Income Tax Law.

 

Since the shares were sold on the listing, your gain of Rs 17860 is considered short-term capital gain and taxed at 20%(cess+ surcharge(if any)

 

So you will be liable to pay 20% * 17860 = Rs.3572 as short-term capital gains tax [excluding Cess and Surcharge]. Please note that the benefit of the basic exemption limit will be applicable in case the taxpayer does not have any other income.

 

Similarly, if you sell the shares after holding them for a period of more than 12 months, it will be considered long-term capital gain and will be taxed at 12.5% if the amount of gain exceeds Rs 1.25 lakhs. In this case, since the capital gains are less than Rs 1.25 lakh, the entire amount will be exempt from tax. In addition to this, the indexation benefit, which was earlier available on long-term capital gains has been removed wef 23rd July 2024, after Budget 2024.

 

How is IPO listing gain taxed?

If you sell shares received through an IPO on the listing day, within a few days, or within a year of allotment, the profit will be treated as short-term capital gain. You will need to pay a 20% STCG tax on this profit.

 

 What is the tax on Ltcg on sale of listed shares?

It's important to note that long-term capital gains (LTCG) from the sale of shares up to Rs 1.25 lakh in a financial year (April to March) are tax-exempt. However, any LTCG exceeding Rs 1.25 lakh in a financial year is taxed at a flat rate of 12.5% without indexation benefits.

 

 How can I save tax on my IPO?

If you sell shares within 12 months of the IPO, any profit is classified as Short-term Capital Gain (STCG) and is taxed at a higher rate. However, if you hold the shares for more than 12 months before selling, the profit is treated as Long-term Capital Gain (LTCG), which typically benefits from a lower tax rate. 

 

 How much capital gain is tax-free?

Gains up to ₹1.25 lakh in a financial year are tax-exempt, offering a benefit for small investors. For non-equity assets, however, there is no such exemption. All gains from these assets are taxed after applying indexation.

 

Setting Off Of Short-Term Capital Gain Against Capital Loss

If you have any short-term capital loss, you can set it off against short-term/long-term capital gain. But the same cannot be done for long-term capital loss. That will have to be set off only against long-term capital gain.

 

"If you are unable to set off the loss this year, you may carry it forward for a period of 8 years provided your Income-tax return is filed this year," said Soni.