How to Calculate Capital Gain on Shares Received in a Demerger?
A demerger can result in shareholders receiving shares of a resulting company while retaining their original shares. The capital-gains rules provide a prescribed method for allocating the original cost between the old and resulting shares.
Quick Answer
In a qualifying demerger, the original cost is not simply duplicated. It is allocated between the original company shares and the resulting-company shares using the statutory formula, and the holding-period rules must also be considered when either holding is later sold.
Why Does Cost Allocation Matter?
If the original investment cost is left unchanged for both holdings after a demerger, the eventual capital gain can be understated or overstated. The tax law therefore prescribes a cost-allocation mechanism.
How Is Cost Allocated?
The applicable formula uses the net book value of the assets transferred in the demerger relative to the net worth of the demerged company, with the resulting amount allocated to the shares of the resulting company. The balance remains attributable to the original-company shares.
What About the Holding Period?
The holding period of shares in the resulting company can include the period for which the taxpayer held the original company's shares, subject to the statutory conditions.
What Records Are Needed?
Keep the demerger statement, corporate-action details, original purchase records, share quantities before and after the demerger and the cost-allocation calculation.
Practical Checklist
- Record the demerger date and share ratio.
- Keep the company's published cost-allocation information.
- Preserve original acquisition cost and date.
- Recalculate cost whenever one of the resulting holdings is sold.
Related Capital Gains Questions
- What Is Capital Gain in Income Tax?
- What Is Short-Term and Long-Term Capital Gain?
- How to Calculate Capital Gain From Shares?
- What Is Cost of Acquisition for Capital Gains?
