📊 Taxability of IPO: What Every Investor Should Know | Tax Manthan

Initial Public Offerings (IPOs) are one of the most exciting ways for investors to participate in the stock market. Whether you’re a first-time investor or a seasoned market player, understanding the tax implications of investing in IPOs is essential for smart financial planning.

In this article, we break down the tax treatment of IPO investments in India under the Income Tax Act, 1961.

 

📌 1. IPO Allotment: Is It Taxable?

No.
There is no tax liability when you are allotted shares in an IPO. You are simply acquiring an asset — there is no income generated at this point.

✅ Important: No tax is triggered upon allotment, even if the share lists at a premium.

 

📌 2. Sale of IPO Shares: Capital Gains Tax

When you sell your IPO shares — whether on the day of listing or later — capital gains tax is applicable. The nature of tax depends on the holding period:

🔹 a) Short-Term Capital Gains (STCG)

• When: Sold within 12 months of allotment.
• Tax Rate: 20% (plus surcharge & cess).
• Example: You bought IPO shares at ₹100 and sold at ₹150 within 3 months. The ₹50 profit is STCG.

🔹 b) Long-Term Capital Gains (LTCG)

• When: Sold after 12 months of allotment.
• Tax Rate: 12.5% on gains exceeding ₹1.25 lakh per financial year (no indexation).
• Example: If your total LTCG in a year is ₹1.5 lakh, tax is payable only on ₹25,000.

 

📌 3. IPO Application Rejection or Refund

If you apply for an IPO but do not receive allotment, the refund of application money is not taxable. It's just a return of your own funds, and not considered income under the Income Tax Act.

 

📌 4. Listing Day Gains

If you sell your IPO shares on the listing day to capture the listing premium, the profit is treated as short-term capital gain and taxed at 20%.

💡 Example: You applied for shares at ₹100, and they list at ₹150. If you sell them on the listing day, the ₹50 profit is taxed as STCG.

 

📌 5. IPOs Held as Business Stock

If you’re a trader or business (not an investor), and IPO shares are part of your stock-in-trade, then profits are taxed as business income, not capital gains. This income is taxed as per applicable slab rates.

 

🔍 Key Takeaways

Event	Taxable?	Tax Treatment
IPO Allotment	❌ No	Not taxable
Sale within 12 months	✅ Yes	20% STCG
Sale after 12 months	✅ Yes	12.5% LTCG (above ₹1.25 lakh)
Application refund	❌ No	Not taxable
Business of trading in IPO shares	✅ Yes	Treated as business income

 

🧾 Final Thoughts

IPOs offer exciting opportunities — but being tax-aware helps you optimize returns and avoid surprises at filing time. Whether you're holding for the long term or flipping on listing day, knowing the tax rules can make a real difference in your financial outcomes.

For more updates and deep insights into the world of taxation, stay tuned to Tax Manthan — your trusted partner in financial clarity.

 

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