Budget 2022: Fillip to start-ups, ESOPs by capping LTCG surcharge at 15%

At present, long-term capital gains on listed stocks are liable to 15% surcharge max, while other long term capital gains suffer a graded surcharge which goes up to 37%

The Finance Minister has capped the surcharge on long-term capital gains from shares of unlisted companies at 15 per cent in the Union Budget 2022-23. This will promote further direct investments in start-ups by high-net worth individuals, venture capital firms and boost the use of ESOPs (employee stock options) by start-ups to remunerate top talent, according to experts.

“The long-term capital gains on listed equity shares, units etc. are liable to maximum surcharge of 15 per cent, while the other long term capital gains are subjected to a graded surcharge which goes up to 37 per cent. I propose to cap the surcharge on long term capital gains arising on transfer of any type of assets at 15 per cent” said FM Nirmala Sitharaman in her budget speech.

Taxation experts said that the impact of this move will be more for individual investors and start-up employees holding shares of a company, and there will be a lesser impact for VC firms,  and companies that invest in start-ups.

“If you do the math, it shows that the amount of savings can be substantial. Let’s say there was a LTCG of Rs 5 crore, then the effective rate currently is 28.50 per cent. Now, that drops down to 23.92 per cent,” said Harry Parikh, Associate Partner at management consulting firm BDO India.
 

"The slab of 25-37% surcharge was introduced a couple of budgets ago. The change announced today will help start-up founders, employees and domestic VCs selling unlisted shares which in turn will set off a virtuous cycle of more investments in the start-up ecosystem,” said Siddarth Pai, managing partner of VC firm 3one4 Capital.

“For ESOP holders, this change is a step forward to the long-awaited ask of tax parity between listed and unlisted securities. This will boost ESOPs as a means of attracting and retaining talent and increase rupee capital participation in the Indian startup ecosystem,” he added.

Another taxation benefit given to the start-up sector in Union Budget 2022-23 is that the eligibility criterion to avail tax incentives has been extended by one more year. However, the issues that exist with the current framework of tax incentives do not seem to have been addressed yet, said experts.

“Eligible start-ups established before 31.3.2022 had been provided a tax incentive for three consecutive years out of ten years from incorporation. In view of the Covid pandemic, I propose to extend the period of incorporation of the eligible start-up by one more year, that is, up to 31.03.2023 for providing such tax incentive,” said Sitharaman in her budget speech.