The Tata Motors demerger took effect on October 1. The company has separated its passenger vehicle (PV) and commercial vehicle (CV) businesses into two independent listed companies. The existing Tata Motors shares have been renamed Tata Motors Passenger Vehicles Ltd (TMPV).
Investors holding Tata Motors shares as of October 14, the demerger record date, have received one equity share of Tata Motors Commercial Vehicles Ltd (TMLCV) for every share held in Tata Motors Ltd, resulting in parallel holdings in both TMLCV and TMPV.
TMLCV is expected to be listed on the stock exchanges in November.
The Tata Motors demerger carries important regulatory and tax implications for shareholders — both at the time of share allotment and during future sale of shares in the demerged entities. Let us examine the tax implications of the Tata Motors demerger.
Tata Motors Demerger: Tax implications
Shareholders have received the allotted TMLCV shares. Under the demerger, the allotment of TMLCV shares does not attract immediate capital gains tax, as such allotment is not treated as “transfer” under the Income Tax Act. This means shareholders face no tax liability when the new shares are credited to their demat accounts.
Nitin Bohra, Associate Partner, Dhruva Advisors, noted that the Tata Motors demerger is expected to be tax neutral for shareholders — meaning you don’t have to pay any tax just because of the demerger.
“There’s no immediate tax impact — it’s just that your existing investment gets divided into two parts,” said Bohra.
However, capital gains tax will apply when investors sell shares of either TMPV or TMLCV. To calculate the tax, investors must divide the original purchase cost of Tata Motors shares between the two companies using a cost allocation ratio that will be announced by the company or its registrar (RTA).
This ratio is usually based on the net book value (NBV) of each business — not their market prices — and is often around 60:40, though the exact figure will be confirmed later.
“Once the new company (TMLCV) is listed, shareholders will simply hold shares of two companies instead of one. For tax purposes, the date when you originally bought Tata Motors shares will also apply to your new TMLCV shares. However, when you eventually sell either of these shares, the original cost of your Tata Motors investment will be split between Tata Motors and TMLCV based on the ratio that reflects their respective net worths,” said Bohra.
The holding period for the new TMLCV shares will be calculated from the original date of purchase of Tata Motors shares, not from the demerger date or the date of share credit. This determines whether any gain qualifies as short-term capital gain (STCG) or long-term capital gain (LTCG).
Tata Motors Demerger: Applicable LTCG and STCG
Long-Term Capital Gains (LTCG): Shares held longer than 12 months and gains exceeding ₹1.25 lakh are taxed at 12.5%.
Short-Term Capital Gains (STCG): Shares sold within 12 months are taxed at 20%. The gains are computed based on the apportioned cost.
Dividends: Taxed as per the investor’s income tax slab, with 10% TDS applicable if total dividend income exceeds ₹10,000 in a financial year.
While no tax arises at the time of Tata Motors demerger, shareholders should maintain records of the original purchase date of Tata Motors shares. Investors should also note the cost allocation ratio once declared by the company. Investors must also consult a tax expert to understand the tax implications of the Tata Motors demerger.
“Apart from that, there’s nothing shareholders need to do immediately — it’s a smooth transition from a tax standpoint,” said Bohra.
FAQs: Tax implications of Tata Motors demerger
1. Will I have to pay tax when I receive TMLCV shares?
No. You will not have to pay tax on the receipt of TMLCV shares after the demerger, as this is not treated as a transfer under Indian tax laws.
2. When will I have to pay tax?
You will have to pay capital gains tax when you sell either TMPV shares or TMLCV shares.
3. How will my cost of purchase be calculated?
The cost of your original Tata Motors shares will be split between TMLCV and TMPV based on a ratio notified by the company (for instance, 60:40).
4. Does my holding period reset after the demerger?
No. To determine whether gains are short-term or long-term, the original purchase date of Tata Motors shares will be applied.
5. How will dividends be taxed?
Dividends from Tata Motors PV or Tata Motors CV will be taxed as per your income tax slab, with 10% TDS if total dividends exceed ₹10,000 in a financial year.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
