Jio Financial Services (JFSL), a company that demerged from Reliance Industries, made its debut on the stock exchanges this week.
For those who received JFSL shares following the demerger, understanding how to calculate their capital gain liability upon selling these shares is crucial.
This guide aims to break down the process in a clear and straightforward manner, focusing on all the necessary calculations and concepts.
Understanding the Demerger
First things first, if you received JFSL shares after the demerger, they are not “free” shares. There is a cost associated with them, that is derived from the demerger.
As per the demerger, if you held 1 share of Reliance Industries before July 20th, you would obtain 1 new share of JFSL after the demerger i.e.
1 Reliance share before the demerger would convert to 1 Reliance share + 1 JFSL share after the demerger.
However, it’s crucial to consider the cost-of-acquisition ratio for a demerger. This ratio indicates how much of the original cost price should be allocated to each of the newly demerged companies.
For Reliance Industries and JFSL, the cost-of-acquisition ratio is 95.32 : 4.68 .
This means that while computing the adjusted cost price of shares post demerger, you must allocate 95.32% of the original cost price to Reliance and 4.68% to JFSL.
This adjusted cost price is vital when calculating your capital gain on JFSL shares.
An Illustrative Example
Consider the following example. Let’s say you bought Reliance Industries shares on two different dates:
- 1-Jun-2021: Bought 100 shares at Rs. 2,000 per share
- 15-Jun-2023: Bought 100 more shares at Rs. 2,500 per share
Your total holding of Reliance shares on the demerger date was 200 shares.
After the demerger, your new holding comprises 200 shares of Reliance Industries and 200 shares of Jio Financial Services.
Computing Adjusted Cost Price
The first step is to compute the adjusted cost price for your Reliance and Jio Financial Services (JFSL) shares post demerger.
Remember that you bought Reliance shares on two different dates (1-Jun-2021 and 15-Jun-2023). Therefore, the adjusted cost price must be calculated for each trade separately.
For the First Transaction (1-Jun-2021):
- Total amount paid = Rs. 2,00,000
- These 100 shares demerged into 100 Reliance and 100 JFSL shares.
Using the given cost of acquisition ratio (95.32% : 4.68%):
- Cost price of 100 demerged Reliance shares = 95.32% * Rs. 2,00,000 = Rs. 1,90,640
- Cost price of 100 JFSL shares = 4.68% * Rs. 2,00,000 = Rs. 9,360
For the Second Transaction (15-Jun-2023):
- Total amount paid = Rs. 2,50,000
- These 100 shares also demerged into 100 Reliance and 100 JFSL shares.
Using the given cost of acquisition ratio:
- Cost price of 100 demerged Reliance shares = 95.32% * Rs. 2,50,000 = Rs. 2,38,300
- Cost price of 100 JFSL shares = 4.68% * Rs. 2,50,000 = Rs. 11,700
As shown in the example, the total adjusted cost price of the shares post demerger (Rs. 2,38,300 + Rs. 11,700) equals the cost price of the original Reliance shares (Rs. 2,50,000).
Computing your Capital Gains
Now, let’s come back to the present day.
Suppose you sell the 200 shares of Jio Financial Services today at Rs. 250 per share.
Total amount received = 200 * 250
= Rs. 50,000
How do you proceed now?
In the example, you bought Reliance shares on two different dates: 1-Jun-2021 and 15-Jun-2023.
These two dates will be the “purchase dates” for your JFSL shares. We have already computed the adjusted cost price for JFSL shares.
Thus, we can now compute capital gains!
Your JFSL “buy trades” will look like this:
- 1-Jun-2021: Bought 100 shares of JFSL for a total amount of Rs. 9,360
- 15-Jun-2023: Bought 100 shares of JFSL for a total amount of Rs. 11,700
For the 1st trade (1-Jun-2021), your capital gain will be long-term as it is held for over 1 year.
Long-Term Capital Gain (LTCG):
= (100 * Rs. 250) – Rs. 9,360
= Rs. 15,640
For the 2nd trade (15-Jun-2023), your capital gain will be short-term as it is held for less than 1 year.
Short-Term Capital Gain (STCG):
= (100 * Rs. 250) – Rs. 11,700
= Rs. 13,300
In this example, we’ve successfully computed your total Capital Gain for your Jio Financial Services shares:
- Long-Term Capital Gain (LTCG): Rs. 15,640
- Short-Term Capital Gain (STCG): Rs. 13,300
How does MProfit help?
In conclusion, understanding how to compute capital gains in the complex landscape of corporate actions can be challenging.
We’ve provided a simplified example in this guide to give you a foundational understanding of the process. However, when you’re dealing with multiple trades and intricate corporate actions, you need a reliable and efficient solution.
That’s where MProfit comes in to make life easy.
With MProfit, the entire process of calculating capital gains, especially in the case of a demerger like JFSL, becomes a breeze. In the above example, MProfit would’ve automatically taken care of:
- Figuring out the cost of acquisition ratio for the demerger
- Deriving adjusted cost prices post demerger
- Computing Long Term and Short Term Capital Gains
So, why not simplify your life and ensure accurate capital gain reporting with MProfit?
Try it out today and see the difference for yourself!