Guide · Costs and taxes · Updated 2026-09-19

A demerger splits your cost of acquisition by book value, and the market prices on your screen have nothing to do with it

A demerger changes two things at once and is usually explained as if it changed only one. The visible change is the share count: a new line appears in the demat account at a ratio fixed by the scheme. The invisible change is to the cost of acquisition, which stops belonging entirely to the company you bought and is divided by a rule that has nothing to do with any price. Nothing is payable when the shares arrive. Everything turns on that division years later, by which time the document carrying the correct ratio is a filing most shareholders never opened.

The scheme is the instrument, and the exchange sees it before the tribunal does

A demerger of a listed company is effected through a scheme of arrangement under sections 230 to 232 of the Companies Act 2013. The scheme names the undertaking transferred, fixes the appointed date from which the transfer takes economic effect, and states the entitlement ratio at which shares of the resulting company will be issued.

What distinguishes a listed company is that the securities regulator reaches the scheme first. Regulation 37 of the listing regulations requires the draft scheme to be filed with the stock exchanges for an observation or no-objection letter before it goes near the tribunal. The exchanges route it to the regulator, which comments, and the letter that comes back is valid for six months.

That sequencing is why the supporting file is thick. The master circular governing these schemes requires a valuation report from a registered valuer, a fairness opinion from a merchant banker on it, and an audit committee report on the need for the arrangement. In specified cases the scheme also goes to public shareholders by electronic voting, and can be acted on only if their votes in favour exceed those against.

The record date values nothing and creates no cost. It answers one question, which is whose name was on the register. One further point defeats a good deal of older writing: when settlement took two days the ex-date fell a day before the record date, and under the current one day cycle the two coincide.

The first price of the new company is discovered, not derived

In a split or a bonus issue the same claim is carved into more pieces, so the exchange adjusts the price by arithmetic. In a demerger two different claims exist where one existed before, and no arithmetic can say how the market will price either. So the exchanges run an auction instead. On the ex-date a scrip that has derivative contracts and has undergone corporate restructuring, which the exchange framework defines to include mergers, demergers, amalgamations, capital reductions and schemes of arrangement, trades in a special pre-open session before the normal market opens.

The mechanics matter. Order collection runs from nine o'clock to a quarter to ten, closed by a system driven random cut in the final minute so no participant can time it, and only limit orders are accepted. Matching happens at a single equilibrium price, the price at which the maximum volume is executable, and that becomes the open. No price band applies: the exchange instead imposes an operating range, which its own guidance calls a dummy circuit filter, purely to block implausible orders. For a scrip trading ex-restructuring the base price is the closing price on the last cum date, a reference rather than an answer.

The resulting company's shares go through the same discovery when they list, weeks or months after the record date rather than on it. Since April 2023 there is a further step: where the equilibrium prices on the two exchanges differ by more than the applicable band, they compute a common equilibrium price as the volume weighted average and apply it uniformly, so a security does not begin life with two prices. None of this produces a cost of acquisition. It produces a price, and the distinction is what follows.

The receipt is not income, and it is not a dividend either

A prior question trips people up in the opposite direction: whether anything is taxable when the shares arrive. It is not, and three provisions have to cooperate. Section 47(vid) takes the issue of shares by the resulting company outside the meaning of transfer, and section 47(vib) does the same for the undertaking itself where the resulting company is an Indian company. Section 2(22) excludes a distribution of shares on a demerger from the definition of dividend. And because the receipt is a transaction not regarded as transfer under section 47, it sits outside the charge in section 56(2)(x) on property received without consideration. Remove any one and shares arriving for nothing would be taxed as something. Together they make the event neutral and defer the whole consequence into the cost base.

The apportionment rule, and why the two sides of the ratio are defined differently

Here is the rule most explainers paraphrase into something false. Section 49(2C) provides that the cost of acquisition of the shares in the resulting company bears to the cost of acquisition of the shares held in the demerged company the same proportion as the net book value of the assets transferred in the demerger bears to the net worth of the demerged company immediately before the demerger. Section 49(2D) then deems the cost of the original shares to be reduced by that same amount.

Two features of that sentence are routinely lost. Both inputs come from books of account, not from a market. And they are not symmetrical quantities: net worth is defined by an Explanation as paid up share capital and general reserves as appearing in the books, which is narrower than total net assets, while the numerator, on the better and generally applied view, is the book value of the net assets of the undertaking that moved, because the definition of a demerger requires the liabilities relatable to it to move with it at book value.

So a shareholder cannot derive the ratio at all. It comes from the company, published afterwards as an intimation filed with the exchanges and ordinarily supported by an accountant's report setting out the computation.

The same holding, split two ways

Take 400 shares bought for 1,00,000 rupees. The scheme gives one share of the resulting company for every two held, so 200 are credited. The company later publishes the apportionment: net book value transferred 560 crore against net worth immediately before the demerger of 7,000 crore, which is eight percent. After listing the parent trades at 300 and the resulting company at 400, so a shareholder splitting by market value sees 1,20,000 against 80,000 and concludes the split is sixty and forty.

The two errors are the same size, 32,000 rupees, and point in opposite directions. That symmetry is why the mistake survives, because it looks self correcting. It is not.

The sales fall in different years. An understated gain one year and an overstated gain another are two wrong returns, not one right one.

The characters can differ. One holding may be sold within twelve months and the other years later, at different rates.

The long term threshold is annual. Gains on listed equity are exempt up to 1,25,000 rupees a year and taxed at 12.5 percent above it, so moving gain between years moves it across that line.

One holding may never be sold. If only the new shares are sold and the parent is held indefinitely, nothing ever offsets the understatement.

The clock is not reset

The second error runs the other way and costs money rather than deferring it. Shares of the resulting company are credited after the record date and begin trading later still, so a report counting from either date classifies them as short term.

The statute says otherwise. Explanation 1 to section 2(42A) requires that, where a capital asset being a share in an Indian company becomes the property of the assessee in consideration of a demerger, the period for which the shares in the demerged company were held is included. Shares held for six years arrive long term on day one.

A companion condition would otherwise defeat this. Section 112A, which carries the concessional long term rate on listed equity, requires securities transaction tax to have been paid on acquisition, and none is paid when shares are credited under a scheme. Sub-section (4) lets the Central Government notify acquisitions to which the condition does not apply, and the notification of 1 October 2018 covers this case. Without it a shareholder would lose the long term rate because of an event they could not decline.

What makes a demerger tax neutral, and what breaks it

Every relief above depends on the transaction meeting the definition in section 2(19AA), which is a list of conditions and is exhaustive rather than indicative. A reorganisation that is commercially sensible and legally effective can still fall outside it, in which case the transfer is a transfer and the shares are consideration.

The one an investor can see from outside is the book value condition, because the scheme documents describe how assets and liabilities are to be recorded. The carve out for entities recording different values under the notified accounting standards exists because a rigid book value rule and modern accounting were pulling apart.

The corner where an older holding gets complicated

Shares bought before 1 February 2018 carry a grandfathered cost: under section 55(2)(ac) the cost is the higher of actual cost and the lower of the fair market value on 31 January 2018 and the sale consideration. For the parent that January value is a quoted price.

It cannot be for the resulting company, which was not listed on that date and in many cases did not exist. The statute deals with this rather than leaving it open. Where a share is listed on the date of transfer but was not on 31 January 2018, and became the assessee's property through a transaction not regarded as transfer under section 47, the fair market value is defined by reference to the cost inflation index applied to the cost of acquisition rather than to any price. It is a constructed value, not an observed one, and it interacts with the apportioned cost in a way that rewards care.

Where the record keeping actually fails

These are not failures of understanding but of sequence, because the correct number arrives months after the event that made it necessary.

The statement is treated as the record. Many Indian brokers populate a corporate action credit with a cost of zero, or with the first traded price, since the ratio does not exist when the shares are credited. Zero overstates every future gain on the new shares and a first day price understates it, and in both cases the parent's cost is left untouched when the statute required it to be reduced.

The purchase records are gone, or averaged. The apportionment applies to the actual cost of the actual purchases, parcel by parcel, including bonus shares that carry a nil cost of their own. An average reconstructed afterwards hides all of that.

The allotment date is used as the acquisition date. The most mechanical error of all, and the only one that changes the rate rather than the amount.

Three documents settle every question raised here, and all exist near the event rather than near the filing: the contract note for the original purchase, the company's intimation of the apportionment with its accountant's report, and your own note of the entitlement ratio, the record date and the two percentages. A cost of acquisition that cannot be traced to a purchase record and a published ratio is an assertion. The arithmetic takes minutes; finding the inputs three years later takes the week.