Reliance Industries demerger: How will income tax be calculated on Jio Financial shares?

A demerger is a corporate restructuring strategy where a company separates one or more of its businesses into separate entities. The latest entity created after the demerger of Reliance Industries Ltd (RIL) is Reliance Strategic Investments Ltd (RSIL), which will be rebranded as Jio Financial Services (JFS) in the future. According to the predetermined share ratio, existing RIL shareholders will receive one share of Jio Financial Services for each share they currently held in RIL till the record date of July 21, 2023. 

After the demerger, the shareholders would hold shares of both RIL and JFS. It is expected that the demerged entity (JFS) will be listed within 2-3 months. But how will capital gains be calculated if you sell JFS shares in the future? How will the cost of acquisition be determined for the new demerged entity? How will the holding period be determined for JFS? Will it be calculated from the date of holding JFS or from buying date of RIL?

Here is what experts say about how the cost of acquisition will be calculated in the case of Jio Financial Services after demerger from RIL:

Yeeshu Sehgal, Head of Tax Market, AKM Global

“Demergers are mostly tax neutral provided there are certain conditions which are stipulated under the Indian tax laws are met. The transfer is done at book values in the case of demerger within the group. Under this demerger, the swap ratio is 1:1. The demerged company (RIL in this case) shall not be liable to pay tax in view of section 47(vib) of Income Tax Act, 1961, since the resulting company is an Indian company. 

Similarly, the resulting company issuing shares to the shareholders of the demerged company has no tax consequence if the transfer or issue of share is made in consideration of demerger of the undertaking. 

However, the shareholders of RIL who will receive shares after the demerger have to compute their tax liability by referring to the cost of acquisition of the shares held in RIL at the time of selling those shares, if any. 

As per the filings made by RIL to the stock exchanges, the cost must be apportioned as 95.32% towards Reliance Industries Limited and the remaining 4.68% as cost to acquire holdings in RSIL. This effectively means if the shares of RIL last closing price before the record date (20th July 2023) let’s say, was Rs. 2,850 (hypothetically), then the 4.68% of Rs. 2,850 which is INR 133 shall be treated as the cost of acquisition of the shares of RSIL.

Vishwas Panjiar, Partner, Nangia Andersen LLP

The investors’ taxability, when they seek to monetise their shareholding, in either of the two entities would also be impacted and investors should bear the following in mind: 

• The Investors would be benefitted, since the period of holding even for the new shares of JFS, shall be counted from the date of acquisition of the shares of RIL. A longer holding period would lead to resultant long-term gains being taxed at a lower rate.

• Further the price paid by the investors originally, towards the shares of RIL would need to be split between the shares of JFSL and shares of RIL:

• Cost of acquisition for the shares of JFS would need to be apportioned based on the proportion of the assets transferred to the JFS in the demerger process, vis-à-vis, net worth of the demerged company immediately before such demerger process was undertaken. The balance cost shall be allocated towards the original shares in the demerged company, RIL

• RIL made a declaration with respect to the above, stating that the cost of acquisition for RIL would be split between RIL and JFSL in the ratio of 95.32% and 4.68% respectively.

• Thus, the investors who held shares in RIL on the record date would now hold shares in RIL and JFS and would need to wait out for the resultant JFSL to get listed and watch out for the tax implications that would be entailed on the sale of such shares.