By ipomarket.in Editorial Team · Last reviewed: 2026-07-11
Disclaimer: This article is for informational purposes only and does not constitute investment advice. IPO investments are subject to market risks. Please read the offer document carefully and consult a SEBI-registered investment advisor before investing.
When you sell shares you received in an IPO, the profit is taxable as a capital gain. How much you pay depends almost entirely on one thing: how long you held the shares before selling. The ₹1.25 lakh annual long-term capital gains (LTCG) exemption is the single most useful tax break available to retail equity investors, but it only kicks in once your shares cross the 12-month mark. This guide explains how the exemption applies to IPO shares specifically, and where retail investors most often go wrong.
The two types of capital gains on IPO shares
Every gain on listed equity shares falls into one of two buckets, decided by your holding period.
- Short-term capital gain (STCG): shares held for 12 months or less. Taxed at a flat 20% (plus 4% health and education cess, so an effective 20.8%).
- Long-term capital gain (LTCG): shares held for more than 12 months. Taxed at 12.5% (plus 4% cess, roughly 13% effective) on the portion of gains above ₹1.25 lakh in a financial year.
These rates apply from 23 July 2024. Before that date, STCG on equity was 15%, LTCG was 10%, and the annual exemption was ₹1 lakh. The current figures were retained without change for FY 2026-27 as per the sources reviewed.
When does your holding period start for IPO shares?
This is where most confusion arises. For IPO shares, the holding period begins on the allotment date — the day shares are credited to your demat account — not the day you applied and not the listing day.
Under SEBI's T+3 listing timeline, allotment usually happens two to three days before listing. So if you sell on listing day or in the weeks that follow, you are almost always in STCG territory, taxed at 20%. To qualify for LTCG treatment, you would need to hold the allotted shares for more than 12 months from the allotment date.
If you are still fresh to how allotment works, our explainer on the IPO allotment process walks through how shares get credited before listing.
Why the holding period decision matters: the math
Consider a gain of ₹2.5 lakh on IPO shares.
- Sold within 12 months (STCG at 20%): tax of roughly ₹50,000 before cess.
- Sold after 12 months (LTCG at 12.5%): the first ₹1.25 lakh is exempt, so only ₹1.25 lakh is taxed at 12.5%, giving about ₹15,625 before cess.
That is a difference of over ₹34,000 on the same gain, purely because of the holding period. This illustration assumes no other capital gains in the year; your actual position depends on your total gains and losses.
That said, tax should not be the only factor in a hold-or-sell decision. Listing-day price behaviour, company fundamentals and your own liquidity needs all matter. Our guide on listing-day strategy covers the non-tax side of this call.
How the ₹1.25 lakh exemption actually works
The exemption is per financial year and aggregate across all equity assets. It is not ₹1.25 lakh per stock, per IPO or per asset class. Your LTCG from listed shares, equity mutual funds and eligible business trusts is added together, and the first ₹1.25 lakh of that combined figure is exempt. Only the excess is taxed at 12.5%.
Two more features are worth remembering:
- It does not carry forward. If you use only ₹60,000 of the exemption this year, the unused ₹65,000 is lost. It does not roll into next year.
- It is available only on long-term gains. Short-term gains do not get any part of this exemption.
You must still disclose tax-free LTCG in your ITR
A common mistake is assuming that because a gain is below ₹1.25 lakh and therefore tax-free, it need not be reported. That is not correct. LTCG covered by Section 112A must still be disclosed in your income tax return, even when the tax payable is zero. Leaving it out can create a mismatch with the data the tax department already receives from exchanges and depositories.
STT: charged on sale, not on allotment
Securities Transaction Tax (STT) is not charged when shares are allotted to you in an IPO. It is charged automatically when you sell on the exchange. Paying STT on sale is what makes your equity gains eligible for the concessional 12.5% LTCG and 20% STCG rates under Sections 112A and 111A. This is one reason selling through the exchange, rather than an off-market transfer, keeps your tax treatment straightforward.
No indexation on IPO shares
Since 23 July 2024, there is no indexation benefit on LTCG from listed equity shares. You cannot adjust your purchase price upward for inflation. Your gain is simply the sale price minus your actual allotment cost.
Family-level and year-end planning ideas
A few legitimate planning approaches come up repeatedly in tax literature. None of these are recommendations; they are context you can discuss with a qualified advisor.
Using more than one taxpayer's exemption. A Hindu Undivided Family (HUF) has its own ₹1.25 lakh LTCG exemption, separate from an individual's. In principle, an individual, a spouse and a HUF together have three separate exemptions totalling ₹3.75 lakh a year. This only works where each entity genuinely owns the shares and files its own return.
Harvesting the annual exemption. Some investors sell long-term shares carrying up to ₹1.25 lakh of gain before the financial year ends and buy them back, resetting their cost base while keeping the realised gain within the exempt limit. India has no wash-sale rule, so selling and rebuying is legal. The theoretical annual saving works out to ₹15,625 (₹1.25 lakh × 12.5%), before considering brokerage and price movement between the sell and rebuy.
Offsetting losses. Capital losses can be set off against capital gains, and unused losses can be carried forward for up to eight years subject to conditions. For example, a ₹50,000 loss set against a ₹3 lakh LTCG brings the taxable figure down and can save tax at the applicable rate.
Section 54F. If you reinvest the entire sale proceeds from long-term shares into a new residential property within the prescribed period, the LTCG can be fully exempt without any upper limit, subject to the conditions of Section 54F. This is a specialised route with strict rules and is rarely relevant for small IPO gains.
FAQ
Does the ₹1.25 lakh exemption apply to listing-day IPO profits?
Usually not. Listing happens within days of allotment, so selling on or near listing day is a short-term gain taxed at 20%. The ₹1.25 lakh exemption applies only to long-term gains, which require holding the shares for more than 12 months from the allotment date.
Is the ₹1.25 lakh limit separate for each stock or IPO?
No. It is a single annual limit that pools all your long-term equity gains — across shares, equity mutual funds and eligible trusts — in a financial year. Only the combined LTCG above ₹1.25 lakh is taxed.
Do I need to report LTCG in my ITR if it is below ₹1.25 lakh?
Yes. Even when the gain is fully exempt and the tax is zero, LTCG under Section 112A must be disclosed in your return to stay compliant.
From which date is my IPO holding period counted?
From the allotment date — the day the shares are credited to your demat account — not from the application date or the listing date.
Has the LTCG rate or exemption changed for FY 2026-27?
According to the sources reviewed, the 12.5% LTCG rate and the ₹1.25 lakh exemption remain unchanged for FY 2026-27. Tax rules can change in future Budgets, so verify the current position before you file.
Bottom line
The ₹1.25 lakh exemption is genuinely useful, but for most IPO investors it stays out of reach because they sell on or near listing day, well inside the 12-month window. Understanding that the holding clock starts at allotment, that the exemption is a single pooled annual figure, and that even tax-free gains must be reported, will keep your filings clean and your decisions informed. For anything involving HUF structuring, Section 54F or loss carry-forward, speak to a SEBI-registered advisor or a qualified tax professional.
Last reviewed: 2026-07-11.