LTCG on transferee company shares on partial demerger

Company X, whose shares are listed in a stock exchange since 1985, has two divisions, A and B. It demerges its division B into a new company Y on 1.1.2019. Shares of company B get listed in a stock exchange very soon thereafter.

Shareholders of X before demerger are allotted one share of Y without any further payment, for every share held in X as on 1.1.2019. Under Section 49(2C) of the Income-Tax Act, the assets of X before the demerger transferred to Y are 30%, with the balance 70% of the net assets being retained by the residual X.

A person held 10 shares of X before 1.1.2019 which he had bought for a total amount of Rs 2,500/-. So after 1.1.2019, he holds 10 shares each in X (the residual company) and 10 shares in Y. After the demerger, his cost of acquisition in the residual company X would be Rs 2,500/- x 70% = Rs 175/- per share of the residual company X, and the cost of acquisition in company Y would be Rs 75/- per share.

If the shareholder sells his 10 shares in company B on 1.4.2020 at Rs 160/- per share through a stock exchange, what would be his LTCG on this sale?

Great question! Let’s break down the LTCG calculation step-by-step based on the details you shared and the provisions of the Income Tax Act.

Given:

Original holding: 10 shares of Company X bought for Rs 2,500 total (cost per share Rs 250).
Demerger date: 1.1.2019.
Asset split under Sec 49(2C):
- 70% assets retained by residual Company X
- 30% assets transferred to new Company Y
Shares post-demerger:
- 10 shares of residual Company X
- 10 shares of Company Y (new company, listed soon after)
Cost allocation:
- Residual Company X: Rs 2,500 × 70% = Rs 1,750 total; per share cost = Rs 175 (1,750/10)
- Company Y: Rs 2,500 × 30% = Rs 750 total; per share cost = Rs 75 (750/10)
Sale of Company Y shares:
- Sold 10 shares on 1.4.2020 at Rs 160 per share → Sale value = Rs 1,600.

Step 1: Determine period of holding for LTCG

The original shares were held since 1985, so holding period is long-term for both original and transferred shares.
Shares of Company Y received on 1.1.2019 will be considered long-term if held for more than 12 months.
Shares sold on 1.4.2020 → held for more than 12 months → qualifies for LTCG.

Step 2: Calculate LTCG on sale of Company Y shares

Sale consideration = Rs 1,600 (10 shares × Rs 160).
Cost of acquisition = Rs 750 (10 shares × Rs 75).

So,

$LTCG = Sale Consideration - Cost of Acquisition = 1, 600 - 750 = R s 850.$

Step 3: Applicability of indexation

Under Section 112A, LTCG on listed shares exceeding Rs 1 lakh is taxable at 10% without indexation.
Indexation benefit is not available for such LTCG after FY 2017-18.
So, LTCG taxable amount = Rs 850 (no indexation).

Final Summary:

Parameter	Amount (Rs)
Sale Price (10 shares)	1,600
Cost of Acquisition	750
LTCG (taxable)	850
Tax Rate on LTCG (Sec 112A)	10%
Tax Payable on LTCG	Rs 85

Important notes:

This assumes shares of Company Y are listed and sale is through recognized stock exchange.
LTCG exemption of Rs 1 lakh applies per individual, so only LTCG exceeding Rs 1 lakh is taxable.
If aggregate LTCG is less than Rs 1 lakh, no tax liability arises.