IPOs, FPOs, ESoPs exempted from STT for availing of concessional 10% LTCG

Also, the off-market transactions undertaken by non-residents in line with FDI guidelines, qualified institutional buyers, venture capitalist without payment of STT too could avail the 10% LTCG rate

Initial public offerings, bonus, rights issues and ESoPs will be eligible for concessional rate of 10 per cent long-term capital gains (LTCG) 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 concessional 10 per cent on LTCG tax exceeding Rs 100,000 from sale of shares, subject to payment of Securities Transaction Tax (STT) at the time of acquiring the equities.

The finance ministry also decided to exempt certain transaction from payment of STT for availing the concessional 10 per cent LTCG rate.

The ministry has notified a list of carve-outs which will be exempt from the requirement of paying STT. These include IPO, follow-on public offer (FPO), bonus or rights issue by a listed company, acquisition approved by Court/NCLT/SEBI/RBI, acquisition pursuant to exercise of ESOPs.

Also, the off-market transactions undertaken by non-residents in line with FDI guidelines, qualified institutional buyers, venture capitalist without payment of STT too could avail the 10 per cent LTCG rate.

Prior to April 2018, the long-term capital gains tax was nil for shares sold after a year of purchase.

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

The CBDT followed a consultative and pro-active approach by seeking stakeholder's 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 clarification was needed with respect to the taxability of the newly introduced long-term capital gains 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 concessional 10 per cent tax on LTCG, the notification also provides carve-outs to insulate genuine acquisitions of non-STT based acquisitions," Nangia said.

The notification also provides situation where concessional rate of LTCG shall be denied in respect of shares acquired during the intervening period i.e. the period of de-listing 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 de-listed 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.