In the Union Budget 2024, the government has proposed that long-term capital gains (LTCG) from unlisted shares will be taxed at the rate of 12.5%. This change may benefit startup employees holding ESOPs. They will gain if their stock options (ESOPs) are purchased by an investor during secondary funding rounds. The reduced LTCG tax rate may also make it lucrative for employees to sell their unlisted stock options.
However, employees may lose more if the startup decides to buy back stock options as gains from such transactions will be taxed at slab rates.
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What Are Secondary Funding Rounds?
These are events where an investor buys shares from existing shareholders (like employees), giving them cash for their shares. Although these transactions are often called ESOP buybacks, they usually involve an investor purchasing the shares rather than the issuing company. This process provides employees with liquidity.
How Does It Help Employees?
If an investor buys the shares, the lower LTCG tax rate at 12.5% applies, making it cheaper for employees to sell their shares. This provides more money in their pockets.
Examples
Let us understand this with the help of some examples –
Suppose Sarah, a startup employee, holds 1,000 stocks priced at Rs 100 each through ESOP. Her shares are purchased by an investor during the secondary funding rounds. Before tax change, her capital gain in this case would have been Rs 400,000, with a 20% LTCG tax costing her Rs 80,000. After the tax change, the LTCG tax is reduced to 12.5%, costing her Rs 50,000, and leaving her with Rs 350,000. Thus, Sarah saves Rs 30,000 in taxes, getting more money from selling her shares.
Also Read: Do You Need Tax Clearance for Going Abroad?
Recently, Swiggy announced its fifth ESOP liquidity program. As part of this initiative, Swiggy, which is preparing for a $1.25 billion initial public offering, is expected to buy back up to $65 million worth of shares from its employees. The income realized from such buyback will be taxed at the slab rate of respective employees.
In March, ecommerce company Meesho also announced a Rs 200 crore Esop buyback program, allowing investors to purchase stock options from its employees. LTCG from this buyback will be taxed at the rate of 12.5%.
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