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Investing in unlisted shares has gained considerable attention in recent years, especially with India’s growing startup ecosystem and opportunities in emerging sectors. While unlisted shares can be an attractive avenue for investment, understanding the taxation on these investments is crucial for investors. As with any other investment, the tax implications of buying, holding, and selling unlisted shares significantly impact returns. This guide explores the key aspects of unlisted shares taxation, offering insights into capital gains, tax computation, reporting requirements, and more, to help investors navigate the complexities of these investments.
Key Takeaways
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Capital gains on unlisted shares vary depending on whether they are held for more than 24 months.
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Long-term capital gains on unlisted shares are taxed at 12.5% without indexation, whereas short-term profits are taxed at the appropriate income level.
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Investors must report unlisted share ownership and profits on ITR-2 or ITR-3.
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Dividend income, donations, and buybacks of unlisted shares are also subject to special tax treatment.
What Are Unlisted Shares?
Unlisted shares are shares of companies that are not listed on recognised stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). These shares are typically held by a select group of investors, including founders, private equity firms, and venture capitalists. They are often part of companies that are either in the early stages of growth, are private companies, or are preparing to go public. Due to their illiquid nature, unlisted shares may not be as easily traded as those of publicly listed companies, but they can offer substantial growth potential.
Also Read, What Is Stock Exchange?
Key Changes in Taxation on Unlisted Shares in India (Old vs New Regime)
Understanding the tax changes between the old and new tax regimes is essential for investors looking to optimise their returns. Here’s a comparison of how the tax treatment of unlisted shares has evolved:
| Aspect | Old Tax Regime | New Tax Regime |
| Long Term Capital Gains Tax | 20% with indexation advantage | 12.5% without indexation |
| Short Term Capital Gains Tax | Taxed as per the income tax slab rates | Taxed as per the income tax slab rates |
Benefits of Investing in Unlisted Shares
- Early investment opportunities: Investors can gain access to companies with high growth potential before they become publicly traded. This early access can offer significant returns if the company goes on to perform well.
- Diversification: Unlisted shares provide an alternative asset class, allowing investors to diversify their portfolios. Diversification can reduce the overall risk exposure by adding investments that are less correlated with the stock market.
- Higher returns potential: Due to the relatively illiquid nature and the early-stage opportunities of many unlisted companies, investors may see higher returns as the companies grow and eventually get listed on public exchanges.
How to Invest in Unlisted Shares in India
Investing in unlisted companies in India presents exciting opportunities, but it requires careful consideration. There are several ways to invest in these stocks:
- Pre-IPO investments: You can invest in pre-IPO companies, which are unlisted but plan to go public in the future. Shares from these companies can be transferred directly to your Demat account, and while the trade occurs off-record, working with a trusted intermediary reduces risks and ensures smooth transactions.
- Start-ups: Many start-ups, though not widely known yet, have high growth potential. These companies might provide significant returns as they grow.
- ESOPs from employees: Employees of certain companies may sell their shares at a predetermined price after a certain lock-in period. Brokers can help you connect with these employees, enabling you to buy shares in top unlisted companies.
- Private placements: To invest a larger stake, you can work with investment banks or brokers to directly buy shares from a company’s promoters, through private placement transactions.
- PMS and AIF schemes: Through Portfolio Management Systems (PMS) or Alternative Investment Funds (AIF), you can invest in unlisted shares as part of a diversified investment strategy, minimising risks and maximising returns.
Taxation on Unlisted Shares in India
Investors must understand the taxation policies surrounding unlisted shares to ensure they comply with tax laws and optimise their investment returns:
- Capital Gains Tax Capital gains on unlisted shares are categorised into long-term and short-term based on the holding period. If the shares are held for over 24 months, the gains are treated as long-term. Conversely, if held for a period less than 24 months, the gains are categorised as short-term.
- Long-term capital gains are taxed at 12.5% without indexation.
- Short-term capital gains are taxed as per the applicable income tax slab.
- Gift Tax:While gifts between relatives are generally exempt from gift tax, the sale of gifted unlisted shares is subject to capital gains tax. The cost price used for calculating the capital gains will be the original owner’s cost, not the cost at which the recipient purchased the shares.
- Reporting requirements:Investors must declare unlisted shares in their Income Tax Return (ITR). This ensures tax compliance and avoids penalties. The details of capital gains, whether short-term or long-term, must be reported in the appropriate sections of the ITR.
Computation of Capital Gains in the Unlisted Market
The computation of capital gains for unlisted shares follows the same principle as that for listed shares. To calculate the capital gain: Capital Gain = Sale Price – Purchase Price Other expenses like brokerage fees may also be deducted to arrive at the net capital gain.
Long Term Capital Gains (LTCG) on Unlisted Shares
Long-term capital gains (LTCG) on unlisted shares occur when they are traded after being held for longer than 24 months. According to existing tax regulations, LTCG on unlisted shares is taxed at a fixed rate of 12.5% with no indexation advantages. The tax is applicable regardless of the investor's income bracket.
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Tax Rates and Indexation Benefits
Long-term profits were formerly indexable. However, under the amended conditions, indexation is no longer permitted. This simplifies tax calculations, but it may raise the taxable gain for long-term holders of unlisted shares.
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Indexation Formula
When indexation was required, the indexed cost of purchase was computed using the Cost Inflation Index (CII) as follows: Indexed cost of acquisition = (cost of acquisition × CII of year of transfer) ÷ CII of year of purchase
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Example Calculation
Assume an investor bought ₹1,00,000 for unlisted shares in FY 2015-16 and sold them for ₹1,80,000 in FY 2024-25. If the CII for FY 2015-16 is 254 and for FY 2024-25 is 348, the indexed cost will be ₹1,37,007. The taxable capital gain is ₹42,993, with a 20% tax due of ₹8,599 (excluding surcharge and cess).
Short Term Capital Gains (STCG) on Unlisted Shares
Short-term capital gains (STCG) on unlisted shares happen when they are sold in less than 24 months (2 years).
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Tax Rate
STCG on unlisted shares is taxed based on the individual's appropriate income tax bracket. Short-term holdings do not benefit from indexation, and any gains are added to total income for the fiscal year.
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Example
Unlisted shares acquired for ₹1,00,000 and sold within 24 months (2 years) for ₹1,80,000 result in a short-term capital gain of ₹80,000. This sum is added to the investor's taxable income and taxed at the appropriate slab rate.
Other Tax Implications on Unlisted Shares
Aside from capital gains, unlisted shares are subject to extra tax obligations that investors must account for when filing their returns.
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Dividend Taxation
Dividends received from unlisted corporations are taxable in the hands of shareholders as "Income from Other Sources" and taxed at the appropriate income tax slab rates.
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Gift Tax
Gifting unlisted shares is taxable if the total fair market value exceeds ₹50,000, save for transfers to designated relatives under the Income Tax Act.
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Buyback Tax
While the repurchase of unlisted shares attracted tax for the company/firm under Section 115QA, it was abolished in 2024. Now, the proceeds are treated as deemed dividend and taxed at the shareholder’s hands.
How to Declare Unlisted Shares in ITR
It is vital to declare any capital gains from unlisted shares in the ITR to avoid penalties and stay compliant with tax laws. Investors must use the ITR-2 or ITR-3 forms to declare such gains.
- Long-term capital gains should be reported under Point B9 of the relevant schedule.
- Short-term capital gains should be reported under Point A5 of Schedule CG.
Important Points to Consider Before Filing an ITR
- Declaration of securities holdings: You must disclose the opening balance of securities at the beginning of the financial year, purchases and sales during the year, and the closing balance at the end of the year.
- Set off rules for capital losses: Capital losses from unlisted shares can only be offset against other capital gains, not against income from salary or business income.
- Treatment of capital losses: Long-term capital losses can only be set off against long-term capital gains while short-term capital losses can be offset against both short-term and long-term gains.
Read More AbouteFiling Income Tax
Conclusion.
Although unlisted shares may not be as easily traded as listed stocks, they provide a valuable avenue for diversifying portfolios and tapping into high-growth companies. Investors who are aware of the taxation on unlisted shares and take the necessary steps to declare their investments can minimise tax liabilities and maximise their potential returns. Disclaimer:This information is for general knowledge and informational purposes only and does not constitute financial, tax, or legal advice. Investors should consult with qualified professionals for personalised guidance. Tax laws and regulations are subject to change, and this information may not reflect the most recent updates.
