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What are the tax implications of investing in a listed IPO?
January 6, 2025
Investing in a listed IPO has become a key strategy for investors looking to diversify their portfolios and gain early access to potential market leaders. For Indian investors, IPOs offer a chance to participate in the growth journey of some of the country’s most promising companies as they go public.
By choosing to invest in a listed IPO, individuals can secure early-bird advantages, often at a discounted price compared to post-listing valuations. However, understanding the tax implications associated with such investments is crucial. Factors like capital gains taxes, dividend distribution taxes, and holding periods can significantly impact the returns on your listed IPO investments.
Understanding the basics of IPO investments
When you invest in an IPO, you are purchasing shares of a company during its initial public offering. After the company lists on the stock exchange, these shares become tradable, making it a listed IPO. The price at which the shares are sold during the IPO is called the issue price, while the price at which the shares trade on the exchange is the market price.
Profits earned from selling IPO shares are subject to capital gains tax, and the applicable tax rate depends on the holding period. Let’s delve into the specifics of these tax implications.
Taxation on short-term capital gains from IPOs
If you sell the shares of a listed IPO within 12 months of allotment, the profit earned is categorised as short-term capital gains (STCG). These gains are taxed at a flat rate of 20% under the Income Tax Act, regardless of your income slab. Additionally, applicable surcharges and cess will also be added to this tax rate.
For example, if you purchase shares in an IPO at ₹100 per share and sell them at ₹150 per share within six months, the ₹50 per share profit will be taxed as STCG.
Taxation on long-term capital gains from IPOs
When you hold the shares of a listed IPO for more than 12 months and then sell them, the profit is considered long-term capital gains (LTCG). Profits up to ₹1 lakh in a financial year are exempt from tax. However, any LTCG exceeding ₹1 lakh is taxed at 12.5% without the benefit of indexation.
For instance, if you invest in an IPO and sell shares after 14 months at a profit of ₹1.5 lakh, you will be required to pay 10% tax on ₹50,000, which is a profit exceeding ₹1 lakh.
Tax deduction at source (TDS)
While there is no direct tax deduction at source (TDS) when you sell shares of a listed IPO, investors should be mindful of reporting their capital gains in their income tax returns. Non-compliance or misreporting can attract penalties or scrutiny from tax authorities.
Dividend income from IPO investments
If a company in which you have invested through an IPO declares dividends, those are subject to taxation based on the income tax slab that the investor comes under. Since April 1, 2020, companies no longer pay dividend distribution tax (DDT), shifting the tax liability to shareholders.
For example, if you invest in an IPO and receive a dividend of ₹10,000, this amount will be added to your total income and taxed as per your slab rate.
Offsetting capital gains with losses
Investors can offset capital gains from listed IPOs against capital losses to reduce their tax liability. Short-term capital losses can offset both short-term and long-term gains. However, long-term losses can only offset long-term gains.
Make informed choices by understanding IPO taxes
Understanding the tax implications of investing in a listed IPO is essential for maximising returns and avoiding potential liabilities. From short-term and long-term capital gains to dividend income and securities transaction tax, each aspect has a direct impact on your financial outcomes. With the increasing availability of trading platforms, it is now easier than ever to invest in IPOs, track your investments, and stay tax-compliant.
For a seamless investment experience, you can consider investing platforms like Ventura that provide comprehensive tools to help you make informed financial decisions.
