HUL-Kwality Wall’s demerger: What retail investors need to know about capital gains tax

Currently, receiving new shares through the demerger has no tax implications

• Kwality Wall’s shares debut at Rs 29.80 after HUL demerger
• Capital gains tax applies only when demerged shares are sold
• Holding period for tax includes time held in parent company

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Kwality Wall’s Ltd made its market debut on February 16, listing at Rs 29.80 on the NSE,  a discount of 25.87 percent over the indicative price of Rs 40.20, following the demerger of the ice-cream business from Hindustan Unilever (HUL).

While the listing marks a new chapter for the ice-cream giant, it leaves retail investors doing the capital gains tax treatment maths for the new shares.

The cost of acquisition

When a company demerges and you receive shares of the new entity, those shares are not treated as “free” for tax purposes as they come out of your original investment. This means the amount you paid to buy the shares of the parent company has to be divided between the old company and the newly formed company.

Mihir Tanna, Associate Director of Direct Tax at SK Patodia & Associate LLP, said, "A demerger is generally a tax-neutral event for shareholders at the time of receiving shares in the resulting company, provided specific statutory conditions are met and no cash consideration is involved."

This means shareholders do not incur immediate capital gains tax liability upon the allotment of new shares. When these shares (either the original shares in the demerged company or the new shares in the resulting company) are subsequently sold, capital gains tax will be applicable.

The period of holding for the new shares in the resulting company includes the period for which the original shares in the demerged company were held.

"The cost of acquisition of the original shares in the demerged company is statutorily apportioned between the retained shares and the new shares received in the resulting company using a prescribed formula. The applicable tax rates for short-term and long-term capital gains will then depend on the nature of the shares and the combined holding period," said Tanna.

The tax rules require this split to be done in the ratio of their net book values (NBV), which reflects the value of the assets transferred to each business as per the company’s books, rather than using the market price, which keeps changing and can distort the calculation.

For instance, if you had invested Rs 1 lakh in ABC Ltd and, after the demerger, 75 percent of the net book value remains with ABC while 25 percent moves to the new company XYZ, then Rs 75,000 will be treated as the cost of your ABC shares and Rs 25,000 that of XYZ shares.

These revised costs are used to calculate capital gains when you eventually sell the shares. If you wrongly assume that the new shares were acquired at zero cost, your taxable profit will appear higher and you may end up paying more tax than required.

Capital gains tax implication

Transferring shares through a demerger scheme is not regarded as a taxable event for shareholders, Section 47 of the Income-Tax Act says. This indicates that merely receiving shares of the new company does not result in capital gains tax. Tax is only applicable when the investor sells the shares.

Dr Suresh Surana said, "From an investor perspective, the relief is provided under section 47(vid), which provides that the issue or allotment of shares by the resulting company to shareholders of the demerged company, in consideration of the demerger, is not treated as a transfer. Accordingly, shareholders are not subject to capital gains tax at the time of receipt of shares in the resulting company."

"Further, Section 56(2)(x) of the Income-tax Act provides for the receipt of property, including shares, without consideration or for inadequate consideration can trigger tax in the hands of the recipient, if the fair market value (FMV) of such property, or the difference between FMV and the consideration paid, exceeds Rs 50,000. In such cases, the amount is taxed as Income from Other Sources," added Surana.

However, the law clearly provides for an exception for transactions that are not regarded as a transfer under Section 47(vib) as well as 47(vid) as aforementioned. As such, where shares are received with regards to such a qualifying transaction, the receipt is outside the scope of Section 56(2)(x). Consequently, no tax is levied on the recipient at the time of receipt, even if the shares are issued without consideration or for inadequate consideration.

Therefore, when shares are sold, capital gains are calculated by considering the basis and any carried-over holding period. During a demerger, the law maintains continuity.

According to Section 2(42A) of the I-T Act, the holding period of the new company’s shares is considered to include the holding period of the parent company’s shares.

This means that if an investor held the parent shares for over 12 months prior to the demerger, both the parent company's shares and those of the new company will be considered long-term.

For example, if you purchased shares in 2024 and a demerger occurred in 2026, the holding period for both the original and new companies begins in 2024. This is important because it can often move your gains into the long-term capital gains (LTCG) category, which benefits from a lower tax rate.

In simple terms, receiving new shares through a demerger has no tax implications. You have received a share in your demat account and need to disclose the purchase price.

HUL demerger

In November 2024, HUL approved the demerger of its ice-cream business, which operated brands including Kwality Wall's, Cornetto and Magnum. The National Company Law Tribunal (NCLT) approved the demerger scheme on October 30, 2025. The share entitlement ratio was set at 1:1.