The 2022 budget has been welcomed by High Net-worth Individuals (HNIs) and Ultra High Net-worth Individuals (UHNIs) despite no drastic changes in personal income tax. The capping of surcharge for individuals on long term capital gains seems to have made most of the difference for this financial year.
As of now HNIs and UHNIs are subjected to graded surcharge rates that go up to 37% if the tax payer’s income exceeds ₹ 5 crore. However, surcharge on incomes arising out of dividends and capital gains realised from the on-market sale of equity shares and other securities is already marked at 15%. And gains from other long-term capital assets like real estate and unlisted shares continue to attract higher surcharges.
In other words, up until the 2022 budget, capital gains tax levied for unlisted shares and listed shares steered investment decisions more toward in favour of listed shares. One could say that it was about time that some parity in tax rates came around. And the 2022 budget did deliver on this with the proposed 15% cap on surcharge for long-term capital gains realised on any kind of asset. Such a cap is only available for long term capital assets, where the asset is held for 12-36 months. Short term capital gains will continue to be subjected to a surcharge of 37%.
This decision also marks surcharge on long term capital gains from shares of unlisted companies at 15%, offering a huge incentive for investors to pool in funds into startups. Additionally it also makes it easier for nascent companies to explore the full potential of Employee Stock Options (ESOPs) in companies that are in their nascent stages. This could help them attract the right kind of talent and act as an effective retention tool!
Including ESOPs as part of compensation structures has grown in popularity over the last few years among startups and established companies alike. According to a report by Nasscom and Zinnov, there has been about 6 to 7x growth in ESOP buybacks in 2021. This is said to be to the tune of $400 million worth of employee stocks during the financial year in which 10,000 employees partici[ated in the buyback.
Going beyond listed and unlisted shares , immovable property, shares of foreign companies or off-market sales of listed shares would also be subjected to the surcharge cap of 15%. Going by this development, the effective capital gains tax rate will be dropped by 2% to 4.5%. Simply put, taxpayers who are currently required to pay tax at 28.5% will be subjected to a rate of tax of 23.92%. Likewise, long term capital gains rate for select assets will be pushed back from 14.25% to 11.96% incase of a base tax rate of 10%.
This development will motivate HNIs to make investments in startups and encourage them to make the most of listed and unlisted share options while providing them with some relief while liquidating their real estate investments.
If you are interested in investing in unlisted shares, get in touch with Unlistedkart. We’ve created a vast ecosystem of pre-IPO and new-age companies for HNI, investors, and retailers to create wealth. And if you are a company seeking liquidity for ESOPs, we could add you to our network of potential buyers to help you grow your business.