Do I owe tax when my shares are merged or demerged?

No. Under Section 47, the swap of your old shares for new ones in a merger, or the issue of new shares in a demerger, is not a transfer, so no capital gain arises at the time. Tax is deferred until you sell the new shares.

What is my cost in the new shares?

It carries over. In a merger the new shares take the cost of your old shares. In a demerger your original cost is split between the retained and the new shares in proportion to their values, so part of the old cost attaches to each.

Does my holding period start again?

No. The holding period of the original shares is included in the new shares (Section 2(42A)), so a long-held investment stays long-term through the reorganisation and is not reset to short-term.

Does this apply to me as an NRI?

Yes, the treatment is the same for a non-resident, provided the amalgamated or resulting company is Indian and you receive shares as consideration. The gain is simply computed from your original cost and date when you eventually sell.

Capital Gains (Securities)

When your Indian shares are merged or demerged

The swap of your old shares for new ones is not a sale, so no tax arises until you actually sell the new shares.

A company whose shares you hold in India has been merged into another, or has demerged part of itself into a new company, and you have received new shares in exchange. It looks like something happened to your holding, so you wonder whether you owe tax, or how to value the new shares. The reassuring answer is that the swap itself is not a taxable event, and your old cost and holding period carry across to the new shares. Getting that carryover right is what matters when you eventually sell. Here is how it works.

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Last reviewed: 26 July 20266 min readReviewed by Preetesh Maloo, CA

The short answer

When your shares are swapped for shares of another company in a merger, or you receive shares of a new company in a demerger, that swap is not treated as a transfer, so no capital gain arises at the time, under Section 47. Instead, your cost and your holding period carry over to the new shares: in a merger the new shares take the cost of the old ones, and in a demerger the original cost is split between the retained and the new shares by their values. So tax arises only when you eventually sell the new shares, computed from your original cost and original purchase date. This applies to an NRI the same way, provided the company you receive shares in is Indian.

References on this page

A merger swap (Section 47(vii)) and a demerger share issue (Section 47(vid)) are not transfers, so no capital gain arises at the swap
The cost carries over: merger shares take the old cost (Section 49(2)); demerger splits the cost by value (Section 49(2C)/(2D))
The holding period of the original shares is included (Section 2(42A)), so it is not reset
The relief requires the amalgamated or resulting company to be Indian; it applies to an NRI the same way

The swap is not a sale

The key point is that a merger or demerger does not, by itself, tax you. Under Section 47, when you hand over shares of the amalgamating company and receive shares of the amalgamated company in a merger, that exchange is not regarded as a transfer, so no capital gain arises. The same applies in a demerger, where the resulting company issues you its shares: that issue is not a transfer either.

So there is nothing to pay and, usually, nothing to declare as a gain at the time of the reorganisation. The tax is not forgiven, it is postponed: the gain built into your original shares is preserved and will be taxed when you finally sell the new shares. The relief has conditions, chiefly that the amalgamated or resulting company is an Indian company and that you are given shares as consideration, but for an ordinary shareholder in a domestic merger or demerger those are met.

The cost and clock carry over

Because tax is deferred to the eventual sale, everything hinges on carrying the right cost and date across, and this is where people go wrong. In a merger, the new shares simply take the cost of your original shares under Section 49. In a demerger it is a split: your original cost is apportioned between the shares you keep in the demerged company and the new shares in the resulting company, in proportion to their values, so part of your old cost attaches to each.

Just as important, the holding period does not reset. Under Section 2(42A), the time you held the original shares is included in the holding period of the new shares, so a long-held investment stays long-term through the reorganisation and does not become short-term again. So when you sell the new shares, you compute the gain from your original cost, as carried or apportioned, and your original acquisition date. For an NRI this carryover is the same, and keeping the paperwork from the original purchase, through the merger or demerger, to the eventual sale is what makes the computation defensible. A practising CA carries the cost and date across correctly and computes the gain on the eventual sale.

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What's involved

What the CA actually does

1
We confirm no tax at the swap
We check the merger or demerger meets the conditions, so the exchange is correctly treated as not a transfer and nothing is taxed at that point.
2
We carry the cost across
We attach your original cost to the new merger shares, or apportion it across the demerger shares by value, so the basis is right.
3
We preserve the holding period
We include the original holding period in the new shares, so a long-held investment does not wrongly become short-term.
4
We compute the eventual sale
When you sell the new shares, we work the gain from the original cost and date, so it is correct and defensible.

What to have ready

Documents you'll typically need

The original share purchase details and cost
The merger or demerger scheme and the shares received
The values used to apportion cost, in a demerger
Your PAN and residency details

Your destination country can change the details

Requirements differ from one consulate, university and visa route to the next — how recent the figures must be, how long funds must have been held, and which certificates are mandatory. We assemble the documents around the exact checklist you're applying under. To see how India's tax treaty with your country of residence affects related filings, set your country below or compare all 31 countries.

Frequently asked questions

Common questions

If this matched your situation, these go further

The grandfathered cost of listed shares you bought before 2018 When your Indian shares are bought back: a rule that changed twice Selling shares in an unlisted or private Indian company, as an NRI NRI ITR filing (we file for you)DTAA TDS recovery Stocks / equity redemption coordination Capital gains calculator

Your Indian shares merged or demerged?

Tell us the reorganisation and your original cost. A practising CA will carry the basis across correctly on a free call, no obligation.

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