IPOs, bonus issue, share gifts get capital gains tax exemption

Genuine equity investments through IPOs, bonus or rights issues by a listed company will be exempt from long-term capital gains tax even if no securities transaction tax (STT) was paid on the transfers, as per the new rules on equity transactions notified by the Income Tax Department.

The new I-T rules also exempt holding-subsidiary transactions or transactions involving mergers/demergers, equity investments made by a non-resident under FDI regulations, employee stock options or gifts in the form of shares from long term capital gains tax.

However, transaction involving acquisition of existing listed equity shares through a preferential issue in a company whose shares are not frequently traded, transactions of the stock exchange, and acquisition during the delisting period of the company would mandatorily require STT payment to get the benefit of exemption from capital gains tax.

According to the notification that follows draft rules issued in April this year, the Central Board of Direct Taxes (CBDT) has specified transactions where payment of STT would be mandatory to get exemption from payment of capital gains tax.

The rules come into force with effect from 1 April 2018, and accordingly apply to assessment year 2018-19 and subsequent assessment years, according to the CBDT.

An amendment to Section 10(38) of the I-T Act was brought in after the tax department noticed that shell companies were being created by entering into sham transactions and unaccounted income was being routed into these companies to avail long-term capital gains benefits.

The amendment provides that capital gains exemptions for income arising from the transfer of shares acquired on or after 1 October 2004, will be available only if the acquisition was chargeable to STT.

The Income Tax department has now notified three types of transactions where the provision will apply, while sparing genuine ones. The first is where an acquisition of a listed equity share, which is not frequently traded in a recognised stock exchange, takes place through preferential issue.

The second, those acquisitions where the listed scrip is not purchased over a recognised stock exchange. And third is the acquisition during the delisting period of the company.

For each of the three categories, payment of STT will be mandatory to avail benefit of capital gain exemptions.

The notification provides that capital gains exemption shall be available in case of share acquisition (without STT) made by non-residents/venture capital funds under the specified situations, for share acquisition made under ESOP or approved M&A schemes and the Sebi guidelines.

It also extends the relief to share acquisition which has been approved by the Supreme Court, High Court, National Company Law Tribunal, Securities and Exchange Board of India or Reserve Bank of India.