Tax Considerations for Jio Financial Services Shareholders: Key Details

Reliance Industries, India’s largest company in terms of market capitalization, recently demerged its financial arm, Jio Financial Services, last month. 

A demerger involves separating a portion of a company, and in this case, with Jio Financial Services, shareholders of Reliance Industries Ltd are receiving a stake in the demerged entity at a 1:1 ratio, meaning one share for every share held. 

Now, investors would wonder about the tax implications and the necessary actions for managing their holdings in both Reliance Industries and Jio Financial Services. 

Due to the demerger from Reliance Industries and the issuance of new shares in Jio Financial Services, there is a need to apportion the total cost incurred for the original shares. Each investor will receive shares in both companies based on their initial investment, requiring a split of the cost between the two entities. RIL has informed the stock exchanges that the cost should be divided as 95.32% for RIL and 4.68% for Jio Financial Services. 

Let’s understand this with an example. If an investor’s original cost for Reliance shares is, let’s say, Rs 2,340, they would need to allocate Rs 2,230.49 (2,340 X 95.32%) to the main RIL holding and the remaining Rs 109.51 (2,340 X 4.68%) to the Jio Financial Services holding. 

Each investor must perform this allocation based on their individual cost price, which is why the percentage figures have been provided. The cost of shares will vary depending on when they were purchased, making it different for each investor. Consequently, it is crucial for investors to retrieve the cost of purchasing RIL shares to properly manage their holdings in both companies. 

The next aspect concerns the classification of holdings as either short-term or long-term assets. The crucial point here is how the holding period for investors should be determined. According to the Income Tax Act, the holding period for a demerged company should be counted from the date when the shares were originally purchased, not from the date of the demerger. 

This provision offers relief to investors because some may not intend to hold the shares in the new company for an extended period and may choose to sell them shortly after listing. In such cases, even if the allotment of the new shares occurs within a 12-month period, they won’t automatically be considered short-term gains or losses. Instead, the investors must consider the date of purchase of the original Reliance shares to correctly classify the gains or losses. 

If the original holding has completed a period of 12 months, then selling the Jio Financial Services shares will be classified as long-term, and the applicable 10% tax rate will apply. On the other hand, if the holding is classified as short-term, any capital gains will be subject to a 15% tax rate. 

Due to the demerger, the existing RIL shares have undergone a price adjustment, which should be considered to reflect the reduced cost price for the investor. 

It’s crucial for investors to keep in mind that when selling the RIL shares, they must consider the reduced or adjusted cost price, as calculated, and then compare it to the sale price. This will allow them to determine the capital gains or losses they will incur. 

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet, and is subject to changes. Please consult an expert before making related decisions.