Looking for expert help with tax on IPO listing gains and share sales? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
Key Takeaways
- An IPO is a company's first public offer of shares. It is a fresh issue, an offer for sale, or both, and it is governed by the SEBI (ICDR) Regulations, 2018.
- SEBI does not approve an IPO. It issues observations on the draft offer document, and every offer document says so in a disclaimer.
- Retail investors (bids up to Rs 2 lakh) get at least 35% of a regular book-built issue. The minimum application is Rs 10,000 to Rs 15,000.
- Individuals apply through ASBA: the money stays blocked in your bank account until allotment. Applications up to Rs 5 lakh by individuals go through UPI.
- Shares list on T+3, the third working day after the issue closes.
- Selling within 12 months: 20% short-term capital gains tax. After 12 months: 12.5% on gains above Rs 1.25 lakh a year.
What is an IPO? An initial public offer (IPO) is when a company offers its shares to the public for the first time and lists them on a stock exchange. Investors apply during the issue period, shares are allotted to successful applicants, and trading starts on the third working day after the issue closes.
IPOs get a lot of attention, and a lot of the information around them comes from grey market tips and social media. This guide sticks to what SEBI's rules actually say: how the process works, how to apply, how allotment is decided, when shares list, and how the gain is taxed when you sell.
Fresh issue vs offer for sale
| Fresh issue | Offer for sale (OFS) | |
|---|---|---|
| Who sells the shares | The company issues new shares | Existing shareholders (promoters, investors) sell their shares |
| Who gets the money | The company | The selling shareholders |
| Effect on share capital | Increases | No change |
| What to check in the RHP | "Objects of the issue": what the money will be used for | How much of the issue is OFS, and who is selling |
Many IPOs are a mix of both. A large OFS portion is not a problem by itself, but it means that part of your money goes to existing shareholders, not into the business.
Types of IPO: book building vs fixed price
| Book building | Fixed price | |
|---|---|---|
| Price | A price band is announced; the final price is set after bids come in | One price is fixed in the offer document |
| Price band rule | Cap of the band can't exceed 120% of the floor, and must be at least 105% of it (ICDR Regulation 29(2)) | Not applicable |
| When the band is announced | At least two working days before the issue opens | Not applicable |
| Retail share | At least 35% in a regular issue | At least 50% |
Most mainboard IPOs today use book building. As a retail investor you can tick "cut-off" in the application, which means you agree to buy at whatever final price is fixed within the band. Only retail individual investors can bid at cut-off.
The IPO process, step by step
Step-by-Step Guide
How a company goes public in India
Draft offer document (DRHP) filed with SEBI
The company and its lead managers file the draft red herring prospectus with SEBI and the stock exchanges. It is made public for comments.
SEBI observations
SEBI may issue observations or ask for changes (Regulation 25). This is not an approval of the company or the price. The issue must open within 12 months of SEBI's observations.
RHP filed with the Registrar of Companies
The red herring prospectus has everything except the final price and number of shares. The issue opens at least three working days after it is filed.
Price band and anchor investors
The price band is announced at least two working days before opening. Bidding for anchor investors (large institutions) opens one day before the issue opens.
Issue period
The issue stays open for at least three and at most ten working days (Regulation 46). Investors bid through ASBA or UPI.
Allotment, credit and listing (T+3)
Basis of allotment is approved on T+1, shares are credited and money unblocked on T+2, and trading starts on T+3.
Who gets how much: investor categories
In a regular book-built IPO under Regulation 6(1) of the ICDR Regulations, the net offer is split as follows (Regulation 32(1)):
Tax Rate Chart
Allocation in a book-built mainboard IPO
ICDR Regulation 32(1); unsubscribed retail or NII shares can go to other categories
Retail individual investors (up to Rs 2 lakh)
Each retail allottee gets at least one minimum lot, subject to availability
Non-institutional investors (above Rs 2 lakh)
One-third for Rs 2 lakh to Rs 10 lakh, two-thirds above Rs 10 lakh (Regulation 32(3A))
Qualified institutional buyers (QIBs)
5% of the QIB portion is for mutual funds; up to 60% of it can go to anchor investors
A company that does not meet the profitability track record test and lists under Regulation 6(2) must give at least 75% to QIBs, and not more than 10% to retail investors. Check which route the IPO uses in the RHP: a small retail quota is itself a signal about the company's track record.
Anchor investors. Up to 60% of the QIB portion can be given to anchor investors, who bid one day before the issue opens. From 1 December 2025, 40% of the anchor portion is reserved: 33.33% for domestic mutual funds and 6.67% for life insurers and pension funds. Half of each anchor investor's shares are locked in for 30 days and half for 90 days from allotment, so you can expect possible selling pressure around those dates.
Promoter lock-in. The minimum promoter contribution is locked in for 18 months from allotment (3 years if most of the fresh issue money is for capital expenditure). Promoter holding above that is locked in for 6 months (1 year in the capital expenditure case), and other pre-IPO shareholders for 6 months (ICDR Regulations 16 and 17).
How to apply for an IPO
Individuals apply through ASBA (Application Supported by Blocked Amount). The amount is blocked in your bank account, not debited, until allotment. If you get no shares, the block is released; if you get some, only that amount is debited.
What you need:
- A demat account (IPO shares are allotted only in demat form) and a trading account if you apply through a broker
- PAN, which must match the demat account
- A bank account with ASBA, or a UPI ID linked to your bank account in your own name
Ways to apply:
- Through your bank (net banking ASBA): apply from the IPO section of your bank's net banking.
- Through your broker, using UPI: enter the bid in the broker's app with your UPI ID, then approve the mandate in your UPI app before the cut-off time on the closing day (5 pm on T day).
- Physical ASBA form: submit it at a designated bank branch, broker, depository participant or registrar.
Individual investors applying for up to Rs 5 lakh use the UPI mechanism (SEBI circular of 5 April 2022, now part of the ICDR Master Circular).
Example of a retail bid: an IPO has a price band of Rs 95 to Rs 100 and a lot of 150 shares. One lot at the top of the band costs 150 x Rs 100 = Rs 15,000, which is within the Rs 10,000 to Rs 15,000 minimum SEBI requires. The most a retail investor can bid for is 13 lots (13 x Rs 15,000 = Rs 1,95,000), because 14 lots would cross Rs 2 lakh.
How IPO allotment works
Retail category. Each successful retail applicant gets at least one minimum lot, as far as shares allow, and any balance is allotted proportionately (Regulation 49(4)). If there are more valid applicants than available lots, a draw of lots decides who gets the one lot.
For example, if the retail portion has 7,00,000 shares and the lot is 50 shares, at most 14,000 investors can get a lot. If 1,40,000 valid retail applications come in, about 1 in 10 applicants gets one lot, whether they applied for one lot or thirteen.
NII category. Each successful NII also gets at least the minimum application size, subject to availability, and the rest is proportionate (Regulation 49(4A)).
Practical tips:
- Approve the UPI mandate before 5 pm on the closing day. A bid whose mandate isn't approved doesn't count.
- Make sure the PAN, demat account and bank or UPI account are all in the applicant's own name.
T+3: the listing timeline
| Day | What happens |
|---|---|
| T (issue closing day) | Bids close: 4 pm for QIBs and NIIs, 5 pm for retail; UPI mandates must be accepted by 5 pm |
| T+1 | Rejections finalised and basis of allotment approved by the stock exchange |
| T+2 | Money debited or unblocked; shares credited to demat accounts; listing application filed |
| T+3 | Trading starts on the stock exchange |
SEBI moved from T+6 to T+3 by its circular of 9 August 2023; it was mandatory for issues opening on or after 1 December 2023. The schedule above is from Annexure XXIII of SEBI's ICDR Master Circular (updated 9 February 2026).
If shares are not allotted or money is not unblocked on time, the issuer has to pay interest at 15% a year (Regulation 50(3)). Delayed unblocking also attracts compensation from the bank under the Master Circular.
SME IPOs: different rules
SME IPOs list on the SME platforms of the stock exchanges, under Chapter IX of the ICDR Regulations. Two differences matter most to individual investors:
- Minimum application is two lots, and above Rs 2 lakh (Regulation 267(2), from 8 March 2025). So the smallest SME IPO bid is larger than the largest retail bid in a mainboard IPO.
- Offer for sale is capped at 20% of the issue, and each selling shareholder can't sell more than 50% of their holding.
SME IPOs are usually smaller, less liquid and riskier. Read the prospectus with extra care.
Risks before you apply
- Read the RHP, not the headlines. The "Risk factors", "Objects of the issue" and "Financial information" sections tell you what the company does with the money and how it has performed.
- Check the valuation. The "Basis for issue price" section compares the price with the company's earnings and with listed peers.
- Don't rely on GMP. The grey market premium is unofficial, unregulated and often wrong. No exchange or regulator publishes it.
- Listing gains are not guaranteed. Shares can list below the issue price.
- Lock-in expiry dates matter. Anchor (30 and 90 days) and pre-IPO (6 months) lock-ins ending can bring more shares to the market.
Tax when you sell IPO shares
Your holding period starts on the date of allotment. The tax depends on how long you hold the shares and on Securities Transaction Tax (STT) being paid when you sell on a recognised stock exchange. Section numbers below are from the Income-tax Act, 2025, which applies from 1 April 2026, with the old 1961 Act numbers in brackets.
| Held for | Type of gain | Tax |
|---|---|---|
| 12 months or less | Short-term (Section 196; old Section 111A) | 20% |
| More than 12 months | Long-term (Section 198; old Section 112A) | 12.5% on gains above Rs 1,25,000 in a tax year |
Add 4% health and education cess, and surcharge if your income is high. Section 198 also has STT conditions on the purchase side, and the government can notify kinds of purchase where STT on purchase isn't needed (Section 198(5)). We check this for your shares when we file.
Example 1: sold on listing day. You get 150 shares at Rs 100 and sell them on listing day at Rs 130.
| Particulars | Amount (Rs) |
|---|---|
| Sale value (150 x 130) | 19,500 |
| Less: cost (150 x 100) | 15,000 |
| Short-term capital gain | 4,500 |
| Tax at 20% | 900 |
| Cess at 4% | 36 |
| Total tax | 936 |
Brokerage and other selling costs reduce the gain. STT does not: the Act bars a deduction for it.
Example 2: held for 14 months. You sell the same 150 shares at Rs 160. The gain is 150 x Rs 60 = Rs 9,000, a long-term gain. If your total long-term gains on shares and equity funds for the year stay within Rs 1,25,000, no tax is payable on it.
Points to note:
- Rebate doesn't cover these gains. The Section 156 rebate (old Section 87A) can't be used against tax on these special-rate gains. Our 87A and STCG guide explains why many people get a demand on this.
- Basic exemption limit. A resident individual whose other income is below the basic exemption limit can use the unused part of the limit against these gains (Sections 196(2) and 198(3)).
- Losses. A capital loss can be set off against capital gains and carried forward for 8 tax years (Section 111), but only if you file your return by the due date (Section 121).
- Report every sale. Brokers report your trades to the tax department, and they show up in your AIS. Leaving out a listing-day sale is a common reason for notices.
For the full rules on share gains, grandfathering and the ITR schedules, read our guide on tax on sale of listed shares. If you are a promoter or early investor selling unlisted shares in an OFS, see our guide on capital gains on unlisted shares. Rates for every asset class are in our capital gains ready reckoner.
Common IPO claims, corrected
| Claim you may see | What the rules say |
|---|---|
| "SEBI approves the IPO" | SEBI issues observations. Every offer document states that filing with SEBI does not mean it has been cleared or approved by SEBI. |
| "The RHP is the draft prospectus filed with SEBI" | The draft filed with SEBI is the DRHP. The RHP is filed with the Registrar of Companies later, before the issue opens. |
| "Allotment comes within 2 days and listing whenever the exchange decides" | Under SEBI's T+3 timeline, allotment is finalised on T+1, shares are credited on T+2 and trading starts on T+3. |
| "Applying for more lots improves your chances" | In an oversubscribed retail portion, each allottee gets one minimum lot by draw of lots. Extra lots don't improve the odds of getting the first lot. |
| "GMP shows the listing price" | GMP is unofficial and unregulated. It is not published by any exchange or SEBI. |
How Tax Garden helps
If you sold IPO shares this year, we work out your short-term and long-term gains from your broker's statement, match them with your AIS, set off and carry forward losses, and file your return through our ITR filing service. We don't give stock tips or advice on which IPO to apply for.
Sources: SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, as last amended on 21 March 2026 (Regulations 2(1)(vv), 6, 16, 17, 25, 29, 32, 44, 46, 47, 49, 50, 267 and Schedules VI, XIII and XIV); SEBI Master Circular for ICDR, last updated 9 February 2026 (Chapter 11 and Annexure XXIII, T+3 timeline); SEBI circular SEBI/HO/CFD/TPD1/CIR/P/2023/140 dated 9 August 2023; SEBI circular SEBI/HO/CFD/DIL2/CIR/P/2022/45 dated 5 April 2022 (UPI limit); Income-tax Act, 2025 as amended by the Finance Act, 2026 (Sections 111, 121, 156, 196 and 198). Official sites: sebi.gov.in, incometaxindia.gov.in. Position as of 13 October 2026. This article is general information, not investment advice.
Frequently Asked Questions
What is an IPO?
An initial public offer (IPO) is the first time a company offers its shares to the public. It can be a fresh issue, where the company issues new shares and gets the money, an offer for sale (OFS), where existing shareholders sell their shares and they get the money, or a mix of both. After the IPO the shares are listed and traded on a stock exchange.
Does SEBI approve an IPO?
No. The company files a draft offer document with SEBI, and SEBI may issue observations or ask for changes. Every offer document must carry a disclaimer that filing with SEBI should not be taken to mean SEBI has cleared or approved it, and that SEBI takes no responsibility for the financial soundness of the project or the correctness of the statements made (ICDR Regulations, Schedule VI).
What is the difference between a DRHP and an RHP?
The draft red herring prospectus (DRHP) is the draft offer document filed with SEBI for observations. The red herring prospectus (RHP) is filed with the Registrar of Companies after that, and does not yet carry the final price or exact number of shares. The issue can open only after at least three working days from filing the RHP. Once the price is fixed, the final prospectus is filed.
How much can a retail investor apply for in an IPO?
A retail individual investor is an individual who applies for not more than Rs 2 lakh (ICDR Regulation 2(1)(vv)). In a mainboard IPO, the minimum application is set between Rs 10,000 and Rs 15,000 and applications go up in multiples of that lot. Individuals applying for more than Rs 2 lakh fall in the non-institutional investor (NII) category.
How is IPO allotment done for retail investors?
If the retail portion is oversubscribed, SEBI's rule is that each retail investor gets at least one minimum bid lot, as far as shares are available, and the balance is allotted proportionately (Regulation 49(4)). When there are more applicants than lots, the lots are allotted by a draw of lots among valid applicants, so applying for more lots does not raise your chance of getting the first lot.
When are IPO shares listed?
Under SEBI's T+3 timeline, shares are listed and trading starts on the third working day after the issue closes (T being the issue closing day). Shares are credited to demat accounts and money is unblocked for unsuccessful applicants by T+2.
How is IPO listing gain taxed?
If you sell IPO shares on a stock exchange within 12 months of allotment, the gain is a short-term capital gain taxed at 20% under Section 196 of the Income-tax Act, 2025 (old Section 111A). If you hold them for more than 12 months, long-term gains above Rs 1.25 lakh a year are taxed at 12.5% under Section 198 (old Section 112A). Cess and any surcharge are extra.
What is GMP in an IPO?
Grey market premium (GMP) is an unofficial figure for the price at which IPO shares are said to be traded informally before listing. It is not published by any stock exchange or by SEBI and is not part of the regulated IPO process, so it is not a reliable guide to the listing price.
What is the minimum investment in an SME IPO?
For SME IPOs, the minimum application size is two lots and must be above Rs 2 lakh, from 8 March 2025 (ICDR Regulation 267(2) as amended). This makes SME IPOs a higher-ticket investment than mainboard IPOs, where the minimum is Rs 10,000 to Rs 15,000.
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