Capital Gains – a big push for HNIs, Angel Investors and Investment Bankers #2022 budget

As of date depending on the asset class, Long Term Capital Gains carry a tax rate between 10-20 percent. This is further increased by an education cess of four percent and a surcharge up to 37 percent.

The current tax laws provide a relief for listed equity shares (11.96 percent) where the effective tax rate is less than half of the effective tax rate on other classes of capital assets (28.496 percent).  The 37 percent surcharge on capital gains was considered to be a hindrance to the currently expanding startup ecosystem in India. Indian startups that are blossoming in the country rely on HNIs, and angel investors to get their funds and at this point, the last thing the ecosystem would need is a high tax rate hindrance.  This is why the change proposed in this year’s budget is promising and is pro-business.

What changed?

In this year’s Union Budget, Finance Minister MrsSitharaman has capped a surcharge on all long-term capital gains, including from the sales of shares of unlisted companies, on par with the listed ones, at 15 percent. Along with the base tax rate, the cess, and the surcharge, the effective tax rate gets reduced from 28.496 percent to 23.92 percent.

The benefit will be felt particularly by HNIs, investors, millionaires making more than five crores annually. This move is also focused on startup employees who hold ESOPs (Employee Stock Options), as most of these startups are unlisted. This tax benefit will yield positive results in an already efficient employee compensation system and ESOPs will now be more useful and impactful in attracting and retaining top talent in promising startups. The effective tax burden for all transactions by privately-funded startups gets reduced by 16 percent. This move benefits hundreds of high-end finance professionals and investment bankers who receive performance-linked carry income through foreign partnerships, reported on their Schedule K1s, as now their highest effective tax rate for such incomes is reduced to 23.92 percent for a person earning Rs 5 crores or more in a year.

Since Venture Capital Firms and private equities have had a huge role in expanding the startup ecosystem by investing around Rs. 5.5 lac crores, the change in surcharge is a welcome one. New startups will now be seen as a different asset class by investors. The finance minister mentioned that this was done as a commitment toward Atmanirbhar Bharat.

What’s New and What Remains the Same?

For taxpayers having gross total income exceeding INR 5 crores pa

Clearly, given the wide range of tax applicability, a capital asset monetization strategy has become more important especially from a tax optimization view.

The amendment will provide a significant boost to the Mutual Funds industry. With the tax on the transfer of virtual digital assets being fixed at 30 percent, the mutual fund industry is hoping to see an influx of young investors who will make the shift from crypto to mutual funds due to lower rates.

With all these changes that are happening and the changes that will happen in the coming years as well for startups, it is advisable that companies have a CFO on board to help navigate the taxation waters.