Capital gain Tax on sale of a startup company

Here's a detailed breakdown of the capital gains tax on the sale of startup shares and tax planning options:

Scenario Recap:

• Startup incorporated FY 2019-20 with capital ~Rs. 4-5 lakhs.

• In FY 2021-22, 70% stake acquired by subsidiary of listed company for Rs. 14 crores approx.

• 61% shares bought from shareholders.

1. Capital Gains Tax on Sale of Shares

• Shares are long-term capital assets if held for more than 24 months (for unlisted shares).

• Since shares were held from 2019-20 to 2021-22 (~2 years), check exact holding period:

  • If >24 months → Long-term capital gains (LTCG)

  • If ≤24 months → Short-term capital gains (STCG)

Assuming more than 24 months → LTCG

2. Computation of Capital Gains

• Full Value of Consideration: Rs. 14 crores * 61% = Rs. 8.54 crores (approx)

• Cost of Acquisition: Rs. 4-5 lakhs invested initially (adjusted for share allotments)

• Indexed Cost of Acquisition: Cost adjusted using Cost Inflation Index (CII) from FY of acquisition to FY of sale.

3. Tax Rate

• LTCG on unlisted shares taxed at 20% with indexation benefit.

• STCG taxed as per normal slab rates.

4. Tax Planning to Reduce Capital Gains Tax

A. Section 54GB – Investment in Startup or SME

• Under Section 54GB, capital gains arising from sale of residential property (not shares) can be exempt if invested in equity shares of eligible startup or SME.

• This does not apply to capital gains arising from sale of shares.

B. Section 54F / 54EC

• 54F is for capital gains from sale of any asset (other than residential house), if reinvested in residential house.

• 54EC allows exemption if gains invested in specified bonds (NHAI, REC) within 6 months, capped at Rs. 50 lakhs.

• These are not directly applicable for shares sale proceeds.

C. Investing in Another Startup (New Startup Exemption under Section 54GB)

• Section 54GB applies to capital gains arising from sale of residential property, provided gains invested in equity shares of a startup or SME within 3 years.

• Since this is sale of shares, not residential property, Section 54GB exemption cannot be claimed.

D. Alternate Tax Planning Strategies

• Holding period planning: Hold shares for >24 months to avail LTCG rates.

• Gift shares: Transfer shares to spouse or minor child to split gains.

• Capital loss set-off: Offset gains with any capital losses.

• Family Trust / Private Trust: Transfer shares to a family trust before sale to manage tax liabilities.

• Tax treaty benefits: If shareholders are NRIs, tax treaty relief can be explored.

5. Summary