Profits On Sale Of IPO Shares Can Be Treated Either As Business Income Or Capital Gains

Capital Gains Tax on Sale of Shares and Properties

The profits on sale of shares on listing and allotted under an IPO can be treated as either business income or capital gains, depending on the facts of the case.

Treatment of IPO Shares

• Profits on sale of IPO shares can be treated as normal business income or capital gains.
• Volume, funds used for such investments, and their treatment in the books of accounts are crucial factors in determining the treatment.
• However, it cannot be treated as a speculative transaction.

Short-Term Capital Gains (STCG) on Residential Properties

Any capital gains arising on sale of a residential property held for less than 24 months is treated as short-term in nature and will be clubbed with other incomes and taxed at the applicable slab rate.

• No tax exemptions are available in case of short-term capital gains.
• The amount of stamp duty and registration charges is included in the cost for computing capital gains.
• Home loan interest paid is not considered as part of the cost of acquisition for computation of capital gains.

Case Study: Saving on Capital Gains Tax

An individual purchased an apartment in 2017 for Rs 12.15 lakh and sold it in October for Rs 30 lakh. To save on capital gains tax, the individual can claim exemption under Section 54F of the Income-tax Act, 1961, by investing the Long-Term Capital Gains (LTCG) in buying a residential house property within two years from the date of sale.

Exemption under Section 54F

• The individual can claim exemption by investing the LTCG in buying a residential house property.
• The construction needs to get completed within three years if the property is under construction.
• If the full capital gains are not utilised for this purpose before the due date of filing of ITR, the individual must deposit the amount of unutilised LTCG in a bank account under the Capital Gains Account Scheme.

Capital Gains Account Scheme

The individual can withdraw this money for the purpose of acquiring the property.