How to calculate capital gains after Reliance demerger: Demystifying Jio Financial Services Shares Understanding Capital Gains Tax Calculation.
The recent demerger of Jio Financial Services (JFS) from Reliance Industries Ltd (RIL) has garnered considerable attention in the financial world. As investors navigate this new development, one critical aspect to consider is the calculation of capital gains tax on JFS shares. In this article, we will break down the process and provide a step-by-step guide on how the capital gains tax will be calculated for JFS shares.
Calculate capital gains after Reliance demerger
Step 1: Understanding the Reliance demerger Details:
On 20th July, RIL demerged JFS, resulting in separate share prices for both entities. The share price of RIL ex-JFS stands at ₹2,580 per share, while JFS is valued at ₹261.85 per share.
Step 2: Apportioning the Cost of Equity Shares:
According to RIL’s exchange filing, the cost of equity shares post-demerger must be divided. 95.32% of the cost is attributed to Reliance Industries Limited, and the remaining portion is considered the cost to acquire holdings in JFS.
Step 3: Calculating the Cost of Shares:
To calculate the cost of acquiring RIL shares after demerger, consider 95.32% of the effective rate before the demerger. For example, if RIL shares were acquired at an effective rate of ₹2,800, the cost of acquiring RIL shares post-demerger would be ₹2,669 (95.32% of ₹2,800). The residual amount of ₹131 (₹2,800 – ₹2,669) is considered as the cost of acquiring JFS shares for the purpose of computing capital gains.
Step 4: Capital Gains Tax Calculation:
Shares are treated as capital assets under income tax law, and any gain on their sale is considered capital gains. In the case of a merger or demerger, the Income Tax (I-T) law does not consider the swap of shares as a transfer.
Capital gains on the sale of shares are calculated based on the holding period and the date of acquisition. In this case, for shareholders who received JFS shares as part of the demerger, the holding period will be counted from the original purchase date of RIL shares.
Step 5: Tax Liability and Sale of Shares:
The tax liability for capital gains will only arise when investors sell their JFS shares. It’s important to note that shareholders won’t have the option to buy or sell JFS shares directly, as the demerged entity will be included in various indices such as Nifty 100, Nifty 200, and Nifty 500, along with other sectoral indices.
Step 6: Classifying Capital Assets:
For listed companies, equity shares held for more than 12 months are categorized as long-term capital assets, while those held for a shorter period are classified as short-term capital assets. The holding period will determine the tax rate applicable on capital gains when the shares are eventually sold.
Read More about the Merger Here
Unraveling the Valuation of Jio Financial Services (JFSL)
Jio Financial Services (JFSL) has garnered significant attention in the financial market, now boasting a market capitalization of Rs 1.66 lakh crore or $20 billion. This impressive figure places JFSL as the second-largest Non-Banking Financial Company (NBFC) in India, trailing only Bajaj Finance. Moreover, it has secured the 32nd spot among the most valued companies in the country. According to calculations by Centrum Broking, JFSL’s net worth stands at approximately Rs 23,500 crore as of FY23.
Despite its remarkable achievements, market veterans, like Samir Arora, find it challenging to value JFSL using traditional methods like price-to-book ratio. The intricacy arises from the fact that JFSL’s book incorporates a significant number of Reliance shares. Consequently, questions arise as to whether these shares should be treated as cash equivalents, earning a potential 6-7% interest, or as shares, which introduces complexities in the valuation process.
This unique aspect of JFSL’s valuation warrants careful analysis, considering the influence of its substantial holdings in Reliance shares on its overall worth. As investors and analysts continue to assess the potential of this rising star in the financial sector, it becomes essential to adopt a prudent and well-informed approach in understanding and valuing JFSL. Expert opinions and thorough research will undoubtedly play pivotal roles in comprehending the true value and growth prospects of this prominent entity in the ever-evolving financial landscape.
Conclusion
Understanding the capital gains tax calculation for Jio Financial Services shares is crucial for investors following the demerger from Reliance Industries Limited. By considering the apportioned cost of equity shares, holding period, and eventual sale of shares, investors can make informed decisions regarding their tax liabilities and investment strategies. As always, consulting with tax experts and financial advisors is recommended to ensure compliance with tax regulations and optimize investment outcomes.