Tata Motors demerger has been effective since October 1. The company has separated its passenger vehicle (PV) business and commercial vehicle (CV) division into two independent listed companies. The listed Tata Motors shares have been renamed as Tata Motors Passenger Vehicles.
Investors holding Tata Motors shares as on October 14, the Tata Motors demerger record date, have received one equity share of Tata Motors Commercial Vehicles Ltd (TMLCV) for every one share held in Tata Motors Ltd, resulting in parallel holdings in both TMLCV and (TMPV).
TML Commercial Vehicles Ltd is expected to be listed on the stock exchanges in November.
The 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. Here are the Tata Motors demerger tax implications.
Tata Motors Demerger: Tax Implications
Tata Motors Commercial Vehicles shares have been allotted to shareholders. Under the demerger, the allotment of TMLCV shares does not attract immediate capital gains tax. Under the Income Tax Act, such allotment is not treated as a “transfer”, meaning shareholders face no tax liability when the new shares are credited to their demat accounts.
However, capital gains tax will apply when investors sell shares of either Tata Motors Passenger Vehicles (TMPV) or Tata Motors Commercial Vehicles (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.
The holding period for the new TMLCV shares will be calculated from the original date of purchase of , not from the demerger date or the date of share credit. This determines whether any gain qualifies as short-term (STCG) or long-term (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 Tata Motors demerger.
FAQs: Tata Motors Demerger Tax Implications
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 Tata Motors Passenger Vehicles shares or Tata Motors Commercial Vehicles 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. In order 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.
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