Tata Motors demerger: No capital gains tax on receipt but be careful when you sell

When a company demerges and you receive new shares, it’s not “free” stock. You need to split your original cost of acquisition between the original company and the new one based on their net book values (NBV), not on the market price.

“Listed companies generally disclose the exact apportionment ratio in their corporate announcements or through exchanges. Investors should simply apply that ratio to their original purchase price,” said Kunal Sharma, founder & managing partner, Taraksh Lawyers & Consultants.

“Most companies publish this ratio, for example 60:40, either in their scheme of arrangement or via communications from the registrar and Transfer Agent (RTA). So if you bought shares for Rs 1,000 originally, Rs 600 becomes the cost of the old company and Rs 400 becomes the cost for the new one. This is the simplest, most accurate way to do it even for small investors,” said Shreya Jaiswal, chartered accountant and founder, Fawkes Solutions, a brand strategy firm.

The same methodology will apply when Tata Motors’ percentage ratio for NBV is announced.

Tax implications 

As of now, at the time you get these new shares on demerger, there is no tax implication. You just have a new share in your demat account and you have to disclose the purchase price.

Section 47(vib)/(vid)/(vb) of the income-tax act provides a clear relief: the transfer of shares under a scheme of demerger is not treated as a taxable transfer in the hands of shareholders.

“This means that simply receiving shares of the resulting company does not trigger capital gains tax. Tax arises only when the investor actually sells the shares,” Sharma said.

For retail investors, there is no special exemption beyond this. The cost of acquisition is apportioned under Section 49(2C)/(2D), and the holding period carries over.

Holding period and capital gains

“When shares are eventually sold, capital gains are computed in the usual way, based on the split cost and carried-over holding period,” Sharma said.

In a demerger, the law ensures continuity. Section 2(42A) of the I-T act says the holding period of the resulting company’s shares is deemed to include the holding period of the parent company’s shares. Simply put, the “clock” does not restart.

“Thus, if an investor had held the parent shares for more than 12 months before the demerger, both the parent and the resulting company’s shares will qualify as long-term,” Sharma said.

Even where the parent shares were acquired in different lots, the respective acquisition dates of those lots continue for the proportionate demerged shares. For retail investors, the guiding principle is simple: the age of your shares remains the same after a demerger.

This means that your holding period doesn’t reset after a demerger. If you bought shares in 2021 and the demerger happened in 2023, the holding period for both the old and new company counts from 2021. “This matters because it often pushes your gains into the long-term capital gains (LTCG) bracket, which is taxed more favourably. Many investors don’t realise this and end up misreporting or overpaying tax,” Jaiswal said.

In case both Tata Motors and the demerged company declare dividends separately, tax will be deducted at source, and the dividend will be taxed as income from other sources. “This is the standard taxation, separate from capital gains, so investors need to account for it while filing returns,” said Vivek Jalan, partner, Tax Connect Advisory Services.

Avoid penalties: track demerged shares right

Keep the original communication from the company or RTA that shows the NBV ratio. Label your shares manually in your demat spreadsheet or in your trading account.  When you sell, cross-check your cost basis with what you initially calculated not just what the platform tells you.

“If you’re filing your return, report these sales properly under Schedule 112A. Many tax software platforms support this now but your numbers need to be correct,” said Jaiswal.