Tax on IPO Gains in India: STCG and LTCG Rules You Need to Know (2026)
Blog by Aliceblue News Desk
22 April 2026
10 minutes
Selling IPO shares on listing day feels straightforward until tax filing season arrives and you realise you owe 20% on every rupee of that listing gain. Worse, the rebate most salaried investors assume will save them does not apply here at all.
IPO taxation in India is not complicated, but the rules have changed since Budget 2024, and several popular beliefs about them are flat wrong. This article lays out the verified numbers, the rules that actually matter, and the mistakes worth avoiding before you plan your next exit.
The One Rule That Determines Everything
The entire tax calculation on IPO shares depends on a single question: how long did you hold the shares before selling?
Hold for 12 months or less from the date of allotment, and your gain is classified as short-term. Hold beyond 12 months, and it becomes long-term. Two different sections of the Income Tax Act apply. Two very different tax rates follow.
The clock starts on the date of allotment, not the date of listing. If your shares were allotted on 5 December 2024 and the IPO listed on 10 December 2024, your 12-month window closes on 5 December 2025. Selling on 4 December 2025 puts you in the short-term bracket at 20%. Waiting one more day drops you to 12.5%.
Short-Term Capital Gains: Section 111A
Any sale of IPO shares within 12 months of allotment falls under Section 111A of the Income Tax Act. This includes selling on listing day, selling two months later, or selling at any point before completing 12 months.
Rate: 20% flat, plus 4% Health and Education Cess
This rate came into effect on 23 July 2024. Before that date, the rate was 15%. If you sold before 23 July 2024, the older rate applies to that transaction.
The 20% rate is only applicable when Securities Transaction Tax (STT) has been paid. For shares bought and sold through a recognised stock exchange, STT is automatically collected at 0.10% on both the buyer and seller sides for delivery-based trades. Every standard IPO bought and sold through a broker qualifies.
The Section 87A issue:
Under the new tax regime, individuals with total income up to ₹12 lakh get a rebate under Section 87A that effectively brings their tax to zero. Many salaried investors assume this wipes out their IPO tax, too.
It does not.
Section 87A applies only to income taxed at slab rates. STCG under Section 111A is taxed at a special flat rate of 20%, and the Income Tax Act explicitly excludes special-rate income from the rebate. So even if your salary is ₹8 lakh and your only other income is ₹40,000 from an IPO listing gain, you owe 20% on that ₹40,000. The rebate on your salary income is separate from this.
Long-Term Capital Gains: Section 112A
If you hold IPO shares beyond 12 months from allotment before selling, Section 112A applies.
Rate: 12.5% on gains above ₹1.25 lakh per financial year
The ₹1.25 lakh threshold is an annual exemption across all your equity investments combined. That means profits from IPO shares, stocks, equity mutual funds, and ETFs all count toward the same ₹1.25 lakh limit in a given financial year. Once your combined long-term equity gains cross that figure, the excess is taxed at 12.5%.
No indexation. No inflation adjustment. No deduction against the gain itself.
Before Budget 2024, the exemption was ₹1 lakh, and the rate was 10%. Both changed on 23 July 2024.
Section 87A does not apply here either. A 12.5% tax on LTCG above ₹1.25 lakh is payable regardless of your total income or the new tax regime threshold.
STCG and LTCG Side by Side
Feature | STCG | LTCG |
Holding period | Up to 12 months | More than 12 months |
Income Tax section | Section 111A | Section 112A |
Tax rate (from 23 July 2024) | 20% + 4% cess | 12.5% + 4% cess |
Annual exemption | None | ₹1.25 lakh (combined equity) |
Indexation benefit | No | No |
Section 87A rebate | Does not apply | Does not apply |
STT requirement | Yes | Yes |
Three Real Scenarios With Actual Numbers
Base: Issue price is ₹500 per share. Allotment: 100 shares. Investment: ₹50,000.
Scenario 1: You sell on listing day at ₹700
Sale proceeds: ₹70,000
Cost of acquisition: ₹50,000
Capital gain: ₹20,000
Classification: STCG
Tax at 20%: ₹4,000
Cess at 4%: ₹160
Tax payable: ₹4,160
This tax is owed even if ₹20,000 is your only income of the year.
Scenario 2: You hold for 14 months and sell at ₹900. No other equity gains that year.
Capital gain: ₹40,000
Classification: LTCG
₹40,000 is below the ₹1.25 lakh exemption
Tax payable: ₹0
Scenario 3: You hold for 14 months. Your total LTCG from all equity that year is ₹2 lakh.
Taxable portion: ₹200,000 minus ₹125,000 = ₹75,000
Tax at 12.5%: ₹9,375
Cess at 4%: ₹375
Tax payable: ₹9,750
ESOPs and Pre-IPO Shares
ESOPs (Employee Stock Option Plans)
When a company you work for is listed on the stock exchange, and you hold ESOPs, the tax calculation runs in two separate stages.
At the time you exercise your options, the difference between the Fair Market Value on the exercise date and the exercise price is treated as perquisite income. It gets added to your salary and taxed at your slab rate. Your employer deducts TDS on this amount.
At the time you sell the shares after listing, the difference between your sale price and the FMV on the exercise date is the capital gain. If sold within 12 months of exercise, that gain is STCG at 20%. If sold after 12 months, it is LTCG at 12.5%. The FMV at exercise becomes your cost of acquisition for the second stage.
Unlisted shares bought before an IPO
If you purchased shares in a private company before it filed for an IPO and then sold those shares while the company was still unlisted, the long-term classification threshold is 24 months, not 12. Once the company is listed and you sell on the exchange, the standard 12-month rule for listed equity applies going forward.
When Your IPO Investment Produces a Loss
A capital loss has tax value if you report it correctly.
A short-term capital loss can be set off against both STCG and LTCG gains in the same financial year. A long-term capital loss can only be set off against LTCG gains. It cannot reduce a short-term gain.
Any losses that cannot be absorbed in the current year are carried forward for up to 8 assessment years. To carry a loss forward, you must file your ITR before the due date, which is 31 July for most individual taxpayers. If you miss the due date, the loss lapses permanently.
Example: You made ₹150,000 in STCG from one IPO and lost ₹60,000 in another (also STCG). Your net taxable STCG is ₹90,000. Tax at 20% is ₹18,000 plus cess.
Dividends Are Taxed Differently
When a company pays a dividend on shares you hold, including IPO shares, that income is not a capital gain. It is added to your gross income and taxed at your income tax slab rate.
If the company pays you more than ₹5,000 in dividends in a financial year, they deduct TDS at 10% before crediting the amount. If you fall in the 30% tax bracket, the remaining 20% is payable when you file your return. If you are below the tax threshold, you can claim a refund of the TDS through your ITR.
Advance Tax, ITR Forms, and Filing Rules
Which ITR form to use:
Salaried individuals with capital gains and no business income should file ITR-2. If you have business or professional income alongside capital gains, use ITR-3. Capital gains go into Schedule CG. STCG and LTCG are entered in separate rows. Do not combine them.
Advance tax:
When your total tax liability for the year exceeds ₹10,000, you are required to pay advance tax in four instalments: 15 June (15%), 15 September (45%), 15 December (75%), and 15 March (100%). If you miss or underpay an instalment, interest accrues at 1% per month under Section 234C on the shortfall. On a ₹20,000 unpaid amount, that works out to ₹200 per month.
Late filing penalty:
Filing your ITR after 31 July attracts a penalty under Section 234F. The penalty is ₹5,000 if your income exceeds ₹5 lakh and ₹1,000 if it is below ₹5 lakh.
Updated Return (ITR-U):
From FY 2025-26, you can file an updated return within 4 years of the end of the relevant assessment year if you missed declaring a gain. Filing ITR-U is not free. An additional tax of 25% on the outstanding amount applies if filed within 12 months of the original due date. That rises to 50% if filed between 12 and 24 months and 60% beyond 24 months.
Five Mistakes That Keep Showing Up
- Counting from the listing date instead of the allotment date
The two dates can be days apart, but the distinction matters when you are close to the 12-month mark. Selling a week early because you miscounted can cost you the difference between 12.5% and 20%. - Expecting Section 87A to cover capital gains tax
This is the most common misconception among salaried first-time investors. The rebate covers tax on income at slab rates only. Capital gains at 20% and 12.5% sit outside its scope entirely. - Not filing ITR when gains fall below the exemption
Zero tax does not mean zero reporting obligation. A ₹90,000 LTCG gain that attracts no tax still needs to be declared in Schedule CG of your ITR. - Not reporting losses
An IPO loss reported in time can offset future gains for up to 8 years. An unreported loss helps no one. The paperwork takes minutes. The tax savings can be real. - Flipping IPOs too frequently
There is no written rule on how many times is too many, but tax officers have reclassified regular listing gain sellers as traders. Once the income is treated as business income, it is taxed at slab rates up to 30%, and you lose the STCG flat rate benefit.
Conclusion
The tax rules on IPO gains are clear once you know where to look. Short-term gains are taxed at 20%. Long-term gains above ₹1.25 lakh are taxed at 12.5%. Neither benefits from the Section 87A rebate. ESOP holders face a two-stage tax event. Losses have carry-forward value only if you file on time. None of these is an obscure rule. They are all in the Income Tax Act and verified through the sources listed above. Knowing them before you sell is always better than discovering them during ITR filing.
Frequently Asked Questions
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