In a bid to encourage more companies to tap into capital markets, the Government of India has proposed a series of IPO-related tax reforms aimed at reducing the fiscal burden on public limited companies during their initial public offering (IPO) phase. Announced in the draft Finance Bill 2026, the reforms seek to streamline tax procedures, incentivize listing, and promote wider investor participation. The key proposals include waiving Securities Transaction Tax (STT) on fresh issue components, offering tax deductions on IPO-related expenses, and deferring capital gains taxation for promoters who retain shares for a defined lock-in period.

One of the major provisions is a proposed deduction under the Income Tax Act for costs incurred by companies on merchant banking, legal advisory, advertising, and compliance for IPOs, capped at 0.5% of the issue size. This deduction would be available in the year of listing, thereby improving cash flow and reducing upfront listing costs. Additionally, promoters and early investors who continue to hold their equity stake for at least 24 months post-listing may benefit from reduced long-term capital gains tax rates, provided the shares were part of the IPO and not acquired through preferential allotment or secondary purchase.

The reforms are expected to benefit mid-sized enterprises and tech-based startups transitioning into the public market, particularly those facing financial constraints during the listing process. The Ministry of Finance has also proposed simplifying tax treatment on ESOPs (Employee Stock Option Plans) offered during IPOs, by allowing employees to defer tax payments until actual sale. These reforms are currently under stakeholder review and are likely to be tabled in the upcoming Union Budget. Experts anticipate that the changes will boost IPO pipeline activity, enhance liquidity, and position Indian markets as more business-friendly and globally competitive.