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ESOPs and FDI deals to be exempt from long-term capital gains tax

The Central Board of Direct Taxes (CBDT) provided relief for genuine transactions where shares were acquired without paying the securities transaction tax (STT). Accordingly, long-term capital gains tax will not be applicable for employee stock ownership plan (ESOPs) and foreign direct investment (FDI) deals. The long-term capital gains (LTCG) exemption will also be applicable for court-approved transactions.

Finance minister Arun Jaitley had introduced the changes in the Income Tax Act this year to deny the LTCG exemption in all cases where STT is not paid, except the notified ones, as indicated by this Mint report. The publication added that the CBDT notification is significant as many stressed projects in many sectors could look at bankruptcy proceedings where lenders can explore turnaround options that may include management and ownership change before considering liquidation and sale of physical assets.

However, in cases of acquiring infrequently traded shares via preferential issues will be subject to the LTCG tax. But the LTCG tax exemptions will apply if the infrequently traded shares are acquired by non-residents, venture capital funds and qualified institutional buyers. Typically, these are penny stocks. The tax department is investigating several cases where unaccounted money was used for bogus transactions in penny stocks to claim capital gains tax exemption.

Additionally, the acquisition of shares under SEBI’s takeover code and off-market share purchases by venture capital funds and qualified institutional buyers are also exempt.

However, LTCG tax will be applicable where stocks have been acquired outside the stock exchange platform. It will also be applicable when an investor buys shares just as a firm is delisted and sells once it relists, as indicated by this Business Standard report. The publication also pointed out that issue of shares against warrants, inter-sell transfer of between promoters and strategic acquisitions by private investors will attract long-term capital gains tax.

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