Details To Keep In Mind For Taxation Of Jio Financial Services Shareholders

A demerger results in a part of a company being separated, with the original shareholders getting a stake in the demerged entity. This is what investors are experiencing with Jio Financial Services, where every shareholder of Reliance Industries Ltd. has been given a share in the ratio of 1:1, which means one share for every one share held.

The key question now is the tax impact and the work required for the existing holdings of Reliance Industries as well as Jio Financial Services.

Since there is a separation from an existing company and new shares are allotted to the investor based on the holdings in Reliance Industries, there has to be an apportionment of the total cost that has been incurred for the shares. For an investor, based on their initial investment, they are getting shares in two different companies, so the cost also has to be split between the two companies. RIL has intimated the stock exchanges that the split in the cost should be 95.32% for RIL and 4.68% for Jio Financial Services.

Let us understand this with the help of an example. If the original cost for an investor for the Reliance shares is, say, Rs 2,340, then they would need to allot Rs 2,230.49 (2,340 X 95.32%) to the main RIL holding and the remaining Rs 109.51 (2,340 X 4.68%) to the Jio Financial Services holding. Every investor will have to do this based on their own cost price, which is why the percentage figures have been given. The cost of shares for investors will depend on when they bought the shares, and this will be different for every investor.

This is why going back and getting the cost of the purchase of the shares of RIL is important. 

The next part comes with respect to the holding and how this has to be classified in terms of whether this is a short-term asset or a long-term asset. The main point here is the time period from which the holding period for the investor would be counted. According to the Income Tax Act, the holding period for a demerged company has to be counted from the date on which the shares were originally bought, not the date on which the entities were separated.

This is a relief for the investors because it could be that many of them do not end up holding the shares in the new company for a long time and sell them off in a short period of time after listing. When that happens, just because the allotment of these new shares is within the 12-month period, it does not automatically get classified as a short-term gain or loss. The investor has to consider when they bought the original Reliance shares to classify the gains or losses correctly. If the original holding has completed a period of 12 months, then when they sell the Jio Financial Services shares, they will be classified as long-term, and the applicable 10% tax rate will apply. If the holding is classified as short-term, then the tax rate on any capital gains will be 15%.

The existing RIL shares have adjusted in price for the demerger, and this should also be reflected in the cost price for the investor as this has also been reduced.

The important thing for the investor to remember is that when the RIL shares are sold, they need to take the reduced or adjusted cost price as per the workings and then compare it to the sale price to arrive at the capital gains or losses that they will earn.