Exit Structuring for PE-Backed Indian Companies

The tax outcome on an Indian exit is largely determined by decisions taken at entry: the jurisdiction of the holding entity, the instrument held, and the holding period. Exit route then determines the mechanics. Restructuring shortly before an exit attracts scrutiny and rarely achieves what earlier structuring would have.

The decisions made years ago

Holding jurisdiction determines treaty access and therefore whether capital gains are taxable in India. Treaty positions on capital gains have narrowed substantially, and structures relying on older treaty positions need testing against current provisions and anti-abuse rules rather than being assumed to work.

Instrument determines characterisation. Equity shares, compulsorily convertible preference shares and compulsorily convertible debentures have different treatment on conversion and on sale.

Holding period determines long-term versus short-term treatment. Unlisted shares carry a 24-month holding period, with long-term gains at 12.5% and short-term at slab rates. Listed shares use 12 months, with LTCG at 12.5% above the ₹1.25 lakh exemption and STCG at 20%.

Exit routes and their mechanics

Secondary sale to another financial investor. Capital gains in the seller’s hands, subject to treaty. Withholding obligations fall on the buyer where the seller is non-resident, making withholding a negotiated term and frequently a source of escrow.

Strategic sale. Similar treatment, but diligence is more intrusive and indemnity negotiation harder. Tax indemnities and treatment of contingent liabilities typically become material commercial terms.

IPO. Listed share treatment applies post-listing. Pre-IPO restructuring has its own consequences, and lock-in requirements apply to pre-IPO shareholders.

Buyback. This changed materially. From 1 October 2024, buyback proceeds are taxed as deemed dividend in the shareholder’s hands at applicable slab rates, with the cost of acquisition allowed as a capital loss. The previous company-level buyback tax no longer applies. Any model built on the earlier treatment is wrong, and this materially altered the arithmetic of buyback versus sale.

Dividend and capital reduction. Alternative repatriation routes with their own treatment, sometimes preferable where a full exit is not intended.

Indirect transfer

Transfer of shares of a foreign company deriving substantial value from Indian assets can be taxable in India. Thresholds and exemptions apply, including relief for small shareholders and specified categories of investor.

Any exit executed at an offshore level needs testing against this, and it is regularly overlooked where the Indian asset sits several layers down.

Practical sequencing

Test the holding structure for substance and treaty eligibility two to three years before a contemplated exit, so remediation has time to establish substance rather than appearing exit-driven.

Model each route on current law. Buyback and capital gains treatment have both changed.

Resolve open tax disputes before a sale process where possible, since unresolved exposure converts directly into indemnity, escrow or price reduction.

Agree withholding mechanics early in negotiation.

[INSERT: an anonymised Solique example of an exit where structure review changed the outcome.]

Related reading

• current capital gains rates — Capital Gains Under the Income-tax Act 2025
• the holding structure — Structuring Inbound Investment into India: Entity Selection
• share versus asset sale — Share Purchase vs Asset Purchase in India: Tax Comparison

Sources

• Capital gains and buyback provisions, Income-tax Act — incometax.gov.in