Both the parent and the resultant company’s shares will be considered long-term if an investor owned the parent shares for more than a year prior to the demerger.
With effect from October 1, the automotive giant Tata Motors will demerge its passenger vehicle (PV) and commercial vehicle (CV) businesses into two distinct publicly traded businesses.
On October 14, the record date, those who had Tata Motors shares received one equity share in the new CV firm for each Tata Motors share they owned. Early November is the anticipated listing date for TML Commercial Vehicles Ltd.
Moneycontrol examines the operation of capital gains tax on share sales after a demerger:
The purchase cost
It is not “free” stock when a business demerges and you get fresh shares. Based on their net book values (NBV), not the market price, you must divide your initial purchase costs across the old and new companies.
“Listed firms often use exchanges or corporate releases to provide the precise apportionment ratio. The founder and managing partner of Taraksh Lawyers & Consultants, Kunal Sharma, advised investors to simply apply that percentage to their initial purchase price.
The majority of businesses either include this ratio, such as 60:40, in their scheme of arrangement or in correspondence from the Transfer Agent (RTA) and Registrar. Therefore, if you initially paid Rs 1,000 for shares, the old firm would cost Rs 600, and the new business will cost Rs 400. Even for small investors, this is the most straightforward and accurate method, according to Shreya Jaiswal, founder of the brand management company Fawkes Solutions and a chartered accountant.
The announcement of Tata Motors‘ % ratio for NBV will follow the same process.
According to Vivek Jalan, partner at Tax Connect Advisory Services, “the cost of acquisition per share would go down since your overall purchase price, say 1,000 shares acquired at Rs 500 and 500 shares bought at Rs 700, would be shared among the whole 1,500 new shares.”
Implications for taxes
There are currently no tax implications when you get these additional shares via a demerger. You have to reveal the purchase price of a new share that you just acquired in your demat account.
A clear exemption is offered under Section 47(vib)/(vid)/(vb) of the Income-tax Act: shares transferred under a demerger plan are not considered taxable transfers in the hands of shareholders.
This implies that just obtaining stock in the subsequent business does not result in capital gains tax. Only when the investor actually sells the shares does tax become due, according to Sharma.
Beyond this, there is no particular exception for individual investors. Section 49(2C)/(2D) allocates the purchase cost, and the holding period overruns.
Capital gains and holding time
“Capital gains are calculated in the standard manner, based on the split cost and carried-over holding time, when shares are finally sold,” Sharma said.
The legislation guarantees continuity in a demerger. According to Section 2(42A) of the I-T Act, the holding term of the parent company’s shares is considered to be included in the holding period of the shares of the resultant business.
According to Sharma, “both the parent and the resultant company’s shares will qualify as long-term if an investor has held the parent shares for more than 12 months prior to the demerger.”
The proportionally demerged shares are nevertheless subject to the acquisition dates of the parent shares, even if they were purchased in separate lots. The rule of thumb for individual investors is straightforward: after a demerger, the age of your shares stays the same.
This implies that after a demerger, your holding period remains unchanged. The holding period for both the old and new companies starts in 2021 if you purchased shares in 2021 and the demerger occurred in 2023. This is significant because it often places your earnings in the more advantageous long-term capital gains (LTCG) tax rate. Due to their ignorance, many investors wind up underreporting or overpaying taxes, according to Jaiswal.
Dividends will be taxed as income from other sources and taxed at the source if both Tata Motors and the demerged entity report them separately. “Investors must account for this when submitting returns since it is the ordinary taxes, apart from capital gains,” Jalan said.
Avoid fines by keeping proper track of demerged shares.
Save the first correspondence from the business or RTA that displays the NBV ratio. In your trading account or in your demat spreadsheet, manually label your shares. When you sell, compare your cost basis with your original calculations rather than relying just on what the platform indicates.
Make sure to accurately disclose these sales on Schedule 112A if you are submitting your return. Now, a lot of tax software programs accept this, but your figures must be accurate,” Jaiswal said.