Income Tax department sets capital gains tax rules straight on Esop, FDI

By 

Deepshikha Sikarwar

, ET Bureau|

Jun 06, 2017, 04.08 PM IST

In a significant decision, the Income-Tax Department has clarified about tax rules for capital gains tax made on certain equity investments in case no securities transactions tax (STT) has been paid, putting an end to the uncertainty that arose from the budget proposal relating to such transactions. 
Foreign direct investment, employee stock option and off-market transactions that are recognised by RBI, Sebi, a high court or Supreme Court and NCLAT will not face capital gains tax,even if no securities transaction tax has been paid on them, the income tax department said.
The Central Board of Direct Taxes has notified a rule, introduced in the budget this year, providing for imposition of capital gains tax on acquisition of listed shares in off market transactions if STT is not paid, giving significant relief to genuine investments.
In the budget for FY18, the government had noted the misuse of exemption provided under section 10(38) to income from transfer of long term capital asset such as equities and mutual fund on which STT had been paid. 
“With a view to prevent this abuse, it is proposed to amend section 10(38) to provide that exemption under this section for income arising on transfer of equity share acquired or on after 1st day of October, 2004 shall be available only if the acquisition of share is chargeable to Securities Transactions Tax under Chapter VII of the Finance (No 2) Act, 2004,” the budget had said. 
However, this had unintended consequence of bringing to tax transactions such as ESOPs and FDI, which was not the intent of the provision. The clarification ensures these transactions will not be taxed.