How are capital gains from the sale of shares after a de-merger taxed?

As per the Income Tax Act, there are no tax implications at the time of a de-merger. The issue of shares of the new resulting companies to shareholders is considered as a transfer.

Tax implications on the sale of shares acquired through a de-merger:
  • When the shareholders of the de-merged company are allotted new shares in the resulting companies, there are no tax liabilities. 
  • Tax implications arise only when shares of the resulting companies are sold.
  • To determine capital gains (STCG or LTCG) on the sale of the shares:
    • The holding period is considered from the purchase of the original shares, till the sale of the resulting shares.
    • The acquisition cost is calculated based on the proportion the Net Book Value (NBV) of the original company (before the de-merger) is transferred to the resulting companies. This split will be disclosed by the company.
Provisions of the Income Tax Act

Section 49(2C): The cost of acquisition of shares in the resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in the de-merged company in the same proportion as the net book value of assets transferred in the de-merge bears to the net worth of the demerged company immediately before such de-merger.

Section 49 (2D): The cost of acquisition of the shares held by a shareholder in the original de-merged company shall be deemed to have been reduced by the amount as arrived at under sub-section (2C).

Understanding the tax implications of a de-merger:

Adani Enterprises Limited announces a de-merger. As a result, existing shareholders are to receive shares in the resulting companies as follows: 
1. Adani Enterprises Limited (AEL)
2. Adani Ports and Special Economic Zone Limited (APSEZ)
3. Adani Power Limited (APL)
4. Adani Transmission Limited (ATL)

  • The Net Book Value (NBV) of AEL as on 1st April 2015, was Rs. 10,278.06 crores.
  • Based on company records as on 4th June 2015 (record date), shareholders of AEL will be allotted shares of APSEZ, APL, and ATL on 8th June 2015.
  • Eligible shareholders of AEL will receive shares in the resulting companies as follows: 

No. of shares held in the de-merged companyNo. of shares in the resulting companies received 

For every 10,000 equity shares in AEL 

14,123 equity shares in APSEZ 

For every 10,000 equity shares in AEL 

18,596 equity shares in APL 

For every 1 equity share in AEL 

1 equity share in ATL 

  • Mr. Rohan purchases 1,000 shares of AEL at Rs. 500 per share (Rs. 5,00,000).
  • He is eligible to receive shares as part of the de-merger.
  • The number of shares he will receive and the acquisition cost will be calculated as follows (based on the NBV split and the number of shares received):

Company Name
% of COAShares received  COA Cost per Share
AEL 3049.94 29.67%
1000 1,48,371 148.37
APSEZ 1365.91
APL 3541.80 34.46% 1859 1,72,299
2320.41 22.58% 1000 1,12,882
AEL 10,278.06 100%  

Use our de-merger template to calculate your acquisition costs.

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