An employee, seen through reflections on a glass window, drinks a glass of Indian spiced chai tea as he looks at a computer monitor at a brokerage firm in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

Inflation Indexation To Be Allowed For Sale Of Unlisted Shares

In a relief for those holding unlisted shares in startups and other companies, the government today moved an amendment to Finance Bill 2018 allowing the benefit of inflation indexation while computing the long-term capital gains tax on shares that were unlisted as on Jan. 31, 2018.

To be clear, long-term capital gains tax of 20 percent would apply for the sale of shares in unlisted companies after giving the benefit of indexation, which means that the cost of acquisition will be adjusted for inflation, as per the amendments to the Finance Bill, which was passed by the Lok Sabha today.

Union Budget 2018-19 had proposed a 10 percent tax on long-term capital gains exceeding Rs 1 lakh arising from sale of listed equities, clarifying that investments would be grandfathered. It had not clarified whether indexation would apply while calculating long-term gains tax liability for sale of shares of unlisted entities, especially those planning an initial public offering.

“This is an easier way of giving grandfathering benefit for unlisted shares rather than asking for a valuation of unlisted shares and will help shareholders of companies like NSE which could be listed in the future,” Rajesh Gandhi, partner at Deloitte India said in an emailed statement.

The benefit of indexation would also apply corporate actions like mergers and demergers if shares being sold are not listed as on Jan. 31, Gandhi explained.

The decision, he said, is in line with various representations made by the industry, which otherwise would have led to taxing gains made prior to Jan. 31, which wasn't the government’s intention.

Currently, 15 percent tax is levied on capital gains made on sale of shares within a year of purchase. However, LTCG tax is zero for shares sold after a year of purchase. LTCG on sale of unlisted shares is taxed at 20 percent, while in case of short-term capital gains it is 30 percent.

Other Highlights

  • The government also said that attachment of provident fund will not be allowed under any circumstances or by order of any court, if a borrower becomes a defaulter.
  • It has done away with the obligation of obtaining a PAN card for foreign companies or their related individuals entering into a financial transaction over Rs 2,50,000 in a taxable year, Rajiv Chugh, Tax Partner, EY India said in an emailed statement.
  • The lock in period for investment in specified bonds (issued by National Highways Authority of India or Rural Electrification Corporation) for claiming exemption of LTCG arising from land or building, has been increased to five years from three years earlier, Chugh added.