ITC Demerger: How to calculate capital gains for ITC Ltd. and ITC hotels?

Income Tax Income from Capital Gains
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Hello,

I am holding 50 shares of ITC since last 2 years. I bought it for ₹250/share. I just read about the demerger of ITC shares. Can anyone please help me with whether I need to pay tax on this or not? And how to calculate capital gains if I sell shares of ITC hotels after demerger?

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ITC Ltd. has officially demerged its hotels division, spinning off ITC Hotels Ltd into a separate entity. Shareholders who held ITC shares as of the record date (6th Jan’25) will be entitled to receive shares of ITC Hotels.

The demerger ratio is fixed at 10:1 which means you’ll receive one share of ITC Hotels Ltd. for every ten shares of ITC you own.

As the name suggests, demerger means when a company separates one of its business units into a standalone entity. While companies go for demergers for different reasons, the primary objectives for ITC were:

  • Enhancing Return on Capital Employed (ROCE): The hotels division accounted for approximately 20% of ITC’s capital but contributed only 3%-4% of its overall operating profits.
  • Unlocking value: By separating the hotels business, ITC can sharpen its focus on high-margin segments like tobacco and FMCG, leading to stronger consolidated financials.
  • More choice for investors: Shareholders will now have more flexibility as they can choose to invest in ITC’s hospitality business.

Tax implications for ITC shareholders

Taxation will come into play only when you decide to sell either your ITC shares or the newly acquired ITC Hotels shares. The holding period of the shares will help you determine whether it is a short term gain or long term.

Holding period for ITC Hotels will be calculated from the date of purchase of shares of the original company i.e. ITC Ltd.

The capital gains will be calculated based on how the original cost of your ITC shares is split between ITC Ltd. and ITC Hotels Ltd.

Now, how do you apportion the purchase value between the two companies?

As per Income Tax Laws, the purchase cost of your ITC shares will be divided between ITC Ltd. and ITC Hotels Ltd. based on the book value of assets allocated to each company.

In this case, the split proportion will be announced by ITC.

Let’s assume ITC announces that 3% of the assets are allocated to ITC Hotels Ltd. Here’s how the cost would be split.

Before demerger

  • Number of ITC Ltd. shares held: 50
  • Original purchase cost: ₹12,500
  • Demerger ratio: 10:1

After demerger

  • Number of ITC Ltd. shares: 50
  • Number of ITC Hotels Ltd. shares: 5
  • Purchase cost of ITC Ltd. shares: ₹12,500 x 97% = ₹12,125
  • Purchase cost of ITC Hotels Ltd. shares: ₹12,500 x 3% = ₹375
  • Cost per ITC Hotels share: ₹12125/50 = ₹242.5 per share
  • Cost per ITC Hotels share: ₹375/5 = ₹75 per share

So, if you sell either of your ITC Ltd or ITC Hotels Ltd shares, the capital gains will be calculated on the revised cost per share of each stock.

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