IPOs, Bonus, Rights Issue, ESOPs Exempt From STT For Availing Concessional LTCG Tax

Initial public offerings, bonus, rights issues and employee stock ownership plans will be eligible for a concessional rate of 10 percent long-term capital gains tax even if the securities transaction tax has not been paid earlier.

In the 2018-19 budget, the government had after a gap of 14 years reintroduced a concessional 10 percent on LTCG tax exceeding Rs 1 lakh from sale of shares, subject to payment of securities transaction tax at the time of acquiring the equities.

The Finance Ministry also decided to exempt certain transactions from payment of securities transaction tax for availing the concessional 10 percent LTCG rate.

The ministry has notified a list of carve outs which will be exempt from the requirement of paying the securities transaction tax. These include IPOs, follow-on public offers, bonus or rights issue by a listed company, acquisition approved by court/National Company Law Tribunal/Securities and Exchange Board of India/Reserve Bank of India, acquisition pursuant to exercise of ESOPs.

Also the off-market transactions undertaken by non-residents in line with foreign direct investment guidelines, qualified institutional buyers, venture capitalist without the payment of securities transaction tax too could avail the 10 percent LTCG rate.

Before April 2018, the LTCG tax was nil for shares sold after a year of purchase.

In case the securities transaction tax has not been paid and the transactions are not in the exempt list, the usual LTCG tax rate of 20 percent would apply of sale of shares. Short-term capital gains tax continues to be 30 percent.

The Central Board of Direct Taxes followed a consultative and pro-active approach by seeking stakeholders' comments on the draft notification issued earlier in April 2018 and have duly considered most of the stakeholder comments while issuing the final notification.

Nangia Advisors LLP Managing Partner Rakesh Nangia said a clarification was needed with respect to the taxability of the newly introduced LTCG tax on equity shares, since unintended hardships may have been experienced in certain fact specific cases.

“Alongside the list of acquisition of equity shares which are not eligible for the concessional 10 percent tax on LTCG, the notification also provides carve-outs to insulate genuine acquisitions of non-securities transaction tax-based acquisitions,” Nangia said.

The notification also provides a situation where concessional rate of LTCG shall be denied in respect of shares acquired during the intervening period, that is the period of delisting of company and the day prior to its re-listing.

“A peculiar case of transfer of shares during the intervening period when the shares are delisted may still face hardship owing to the denial of concessional rate. Another area of concern is when acquisition is outside the stock exchange but on account of events such as liquidation, contribution of shares to the firm, etc,” Nangia said.