Tax On Profits From IPO: How To Reduce Tax And Make Maximum Gain?

The last financial year has been good in terms of IPOs. During this period, many investors have gained a lot by booking profits in IPOs like Tata Tech, IREDA to Netweb Technologies, Senco Gold and Motisons Jewellers. But now the financial year is about to end. That means the time is coming to pay tax on the income earned during the last business year. The higher the earnings from the IPO listing, the tax will have to be paid accordingly. But to know how much this tax will be, we will have to understand the method of its calculation. Besides, investors will also be interested to know whether there is any way to reduce the tax liability on this income or not? To know the answers to these questions, let us first understand what are the taxation rules applicable to IPO earnings?

Income tax calculation on income from Shares 

The rate at which income tax will be charged on investments made in equity i.e. shares will be decided by how long you have held your investment. If you sell your equity investments after holding them for 1 year or more, the profit on it is considered Long Term Capital Gains (LTCG), which is subject to 10% LTCG tax. The good thing is that no income tax has to be paid on LTCG up to Rs 1 lakh during a financial year. But if you withdraw your investment in equity and earn profit in less than a year, then you have to pay Short Term Capital Gains (STCG) tax at the rate of 15% on that profit. In this case, you do not get the benefit of tax-free profits up to Rs 1 lakh like LTCG.

How much tax will be charged on booking listing gains in IPO?

If you sell the shares received in IPO on the day of listing, a few days thereafter or within a year of allotment, then the profit earned on it will be considered as short term capital gain. You will have to pay STCG tax at the rate of 15% on this profit. Apart from this, you will also have to pay 2 percent education cess and 1 percent higher education cess on this tax.

Booked profit in IPO: How to reduce tax burden?

If you have earned short term capital gain by selling the shares allotted in IPO immediately after listing or within one year, then you will have to pay short term capital gains tax on it. But there are some legal measures, through which you can reduce your total tax liability to some extent.

If you had applied for IPO through a brokerage and paid fees to the brokerage for this, then you can deduct that fee from your profit.

Similarly, if you have incurred short term capital loss on selling any other share or asset during the same financial year in which you booked profit on listing, you can also reduce your tax liability by adjusting it with the short term capital gain on IPO. 

It must be remembered that the tax liability on short term capital gains can only be adjusted against any short term capital loss incurred during the same financial year. You cannot adjust this against any long term capital loss. Any long term capital loss can be adjusted only against long term capital gain.