Cap on LTCG surcharge, new funds get thumbs-up

MUMBAI: Finance minister Nirmala Sitharaman’s proposals to set up new thematic funds, put a cap on the long-term capital gains (LTCG) surcharge, and extend tax benefits to registered startups for another year, stand to benefit founders, investors and high net worth individuals (HNIs), even as the government took no steps to encourage overseas direct listing for startups.

To begin with, the Budget has proposed to set up thematic funds emulating the Fund of Funds (FoF) set up under the Small Industries Development Bank of India (Sidbi) and the National Investment and Infrastructure Fund (NIIF) to invest in agri-tech, climate action, and pharma. This will create a multiplier effect by seeding multiple alternative investment funds, said Gopal Srinivasan, chairman and MD of TVS Capital Funds.

Gopal Jain, managing partner at Gaja Capital, said this proposal will help onshore private equity (PE) and the venture capital (VC) industry and provide a boost to startups as each FoF will invest in 150-200 start-ups.

The second big move that has excited investors is the cap on LTCG tax surcharge at 15%. The investor community has been for long calling to align the LTCG taxation on unlisted and listed securities. That said, the budget has proposed to only cap the surcharge and not offered parity.

“Overall, the long-term capital gains tax on unlisted securities is now at 23.92% as opposed to 28.5% previously. This will apply to founders, Esop (Employee Stock Option) holders and domestic investors. This is a 16% reduction in tax rate,” said Siddarth Pai, co-founder of 3one4 Capital, and co-chair of the IVCA regulatory committee. However, even with the cap, unlisted securities will be levied surcharge at 2.18 times the rate of their listed counterparts, Pai added.

The move to set up an expert committee for holistic evaluation of regulations governing the PE and VC industry has also brought cheer. The committee is expected to take up over 42 items, Srinivasan said.

On the downside, though, the budget failed to extend tax benefits to startups not registered by the Inter-Ministerial Board (IMB), investors rued.

“Out of 62,000 DPIIT-registered startups in India, only 450 are IMB-certified. Reform in this system was an oft-requested ask in order to broad-base the Income Tax benefits of being a startup,” Pai pointed out.