New thematic funds, cap on LTCG tax surcharge cheer startups, investors
PremiumHNIs investing in the startup and funds ecosystem, too, will have to pay lower taxes on LTCG, an expert said
Finance minister Nirmala Sitharaman’s budget proposals to launch new thematic funds, extend tax benefits to registered startups by a year, and to cap long-term capital gains (LTCG) tax surcharge will benefit founders, startups, investors, and high net-worth individuals (HNIs). However, the government’s decision to ignore demands of overseas direct listing rules for startups was a dampener, said industry watchers.
The budget proposal to set up thematic funds, emulating the fund of funds approach under the Small Industries Development Bank of India and the National Investment and Infrastructure Fund for investments in agritech, climate action and pharma sectors, will create a multiplier effect by seeding multiple alternative investment funds (AIFs) with the funds of funds, said Gopal Srinivasan, chairman and managing director, TVS Capital Funds.
This proposal will help onshore private equity and venture capital firms and boost the startup ecosystem as each fund of funds will, in turn, invest in 150-200 startups, Gopal Jain, managing partner, Gaja Capital, said.
Investors were also excited about the government’s move to cap LTCG tax surcharge at 15%. “Overall, LTCG tax on unlisted securities is now at 23.92% as opposed to 28.5% earlier. This will apply to founders, employee stock option holders and domestic investors. This is a 16% reduction in tax rate," said Siddarth Pai, co-founder, 3one4 Capital, and co-chair of the IVCA regulatory committee. But, despite the cap of 15%, unlisted securities will be taxed at 2.18 times the rate of listed counterparts, Pai added.
It was “an unexpected move", though, for individual taxpayers, mainly HNIs who earn over ₹2 crore, but less than ₹5 crore a year, said Indruj Rai, partner, Khaitan and Co. He added that HNIs investing in the startup and funds ecosystem, too, will have to pay lower taxes on LTCG.
“Most domestic money for AIFs still comes from large family offices where the surcharge was 37%, that now stands reduced to 15%—the same as public markets. This will boost supply of investments into startups and AIFs ," Srinivasan said.
Besides, the move to set up an expert committee on evaluating the regulations governing the PE and VC industry has also brought cheer. The expert committee is expected to take up over 42 items covering the principles of indirect and direct taxation, securities law, the Securities Exchange Board of India, International Financial Services Centres and Authority and Reserve Bank of India regulations, as well as Department of Industrial Policy and Promotion, Srinivasan said.
