We all get excited whenever an IPO is announced in the markets, and the joy of receiving an allotment cannot be compared.
While there might hardly be anyone who doesn’t know what an IPO is, let me briefly explain it once.
An initial public offering (IPO) refers to the process of offering shares of a private company to the public in a new stock issuance. It allows a company to raise capital from public investors.
The general public, like all of us, can apply for an IPO and then the allotment is done.
Do you have to pay tax on IPO Allotment?
So when you get an IPO allotment (wow, someone got lucky), you receive shares of the particular company. But, that is your investment; hence, you don’t have to pay any tax when the shares are allotted to you.
However, when you sell such shares, you’ll have to pay tax on the capital gains.
Tax on capital gains from an IPO
As many IPOs are listed at a good premium, many of us consider booking profits on listing, i.e., selling the shares as soon as they are listed, as this proves to be a good way to earn sizable returns in a short period.
In such a case, as the holding period is less than 12 months, the profits will be classified as short-term capital gains, and tax will be applicable on the same.
There could also be another scenario where you decide to hold the shares for a longer period, as you believe the company will perform well in the upcoming years. If you decide to hold them and sell them after 12 months from the day of allotment, the gains will be classified as long-term capital gains, and those will also be taxable. Below is a table that summarizes the tax rates on long-term and short-term gains.
When do you pay the tax?
Ideally, one should always pay taxes as and when they earn income to avoid last-moment lump-sum tax payments. Moreover, if your tax liability in the entire year exceeds ₹10,000, you are liable to pay advance taxes every quarter by estimating your income.
Say you receive an IPO allotment in TATA Technologies on 29th November and sell the shares on the day of the listing itself to earn those profits. Here, you’ll have to pay short-term capital gains tax at the rate of 15%. As the profits were earned in Q3, advance tax needs to be paid before the due date for Q3, which is 15th December 2023.
You can read the below topic to understand all about advance tax and its due dates.
Advance Tax: Applicability, due date, and more.
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