Taxation on Unlisted Shares in India: A Complete Guide for Investors

Investing in unlisted shares can be highly profitable, but understanding the tax implications is essential to avoid surprises. Capital gains tax on unlisted shares depends on how long you hold the investment before selling. Here’s a breakdown of long-term capital gains (LTCG) and short-term capital gains (STCG) taxation on unlisted shares.

Understanding Holding Period for Taxation

• Short-Term Capital Gains (STCG): If you sell unlisted shares within 24 months (2 years) of purchase, the gains are considered short-term capital gains.

• Long-Term Capital Gains (LTCG): If you sell unlisted shares after holding them for more than 24 months, the gains are classified as long-term capital gains.

This is different from listed shares, where the holding period for LTCG is just 12 months.

Taxation on Short-Term Capital Gains (STCG) on Unlisted Shares

• Tax Rate: STCG from unlisted shares is taxed at the individual’s income tax slab rate.

• Example:

  • Suppose you buy 100 shares of a private company at ₹500 per share and sell them after 18 months at ₹800 per share.

  • Your total gain = (₹800 - ₹500) × 100 = ₹30,000.

  • If you fall under the 30% tax bracket, your STCG tax will be ₹9,000 (30% of ₹30,000).

Taxation on Long-Term Capital Gains (LTCG) on Unlisted Shares

• Tax Rate: LTCG from unlisted shares is taxed at a flat 20% with indexation benefit.

• Indexation Benefit: Helps adjust the purchase price for inflation, reducing taxable gains.

• Example with Indexation:

  • You buy 100 shares at ₹500 per share in April 2020 and sell them in April 2024 for ₹1,200 per share.

  • Purchase Price: ₹50,000 (₹500 × 100 shares).

  • Sale Price: ₹1,20,000 (₹1,200 × 100 shares).

  • Capital Gains Before Indexation: ₹1,20,000 - ₹50,000 = ₹70,000.

  • If the CII (Cost Inflation Index) for 2020-21 is 301 and for 2024-25 is 348, the indexed cost price = ₹50,000 × (348/301) = ₹57,900.

  • Taxable LTCG = ₹1,20,000 - ₹57,900 = ₹62,100.

  • Tax Payable = 20% of ₹62,100 = ₹12,420.

Setting Off Capital Gains Against Losses

• Short-Term Capital Loss (STCL): Can be set off against both STCG and LTCG.

• Long-Term Capital Loss (LTCL): Can only be set off against LTCG.

• Carry Forward: If you cannot set off losses in the same year, you can carry them forward for up to 8 years.

Example:

• If you incur an STCL of ₹50,000 from one unlisted stock but make an LTCG of ₹70,000 from another, you can offset the STCL.

• Your net taxable LTCG = ₹70,000 - ₹50,000 = ₹20,000, and tax = ₹4,000 (20% of ₹20,000).

Important Points to Remember

• TDS (Tax Deducted at Source): No TDS is deducted on unlisted share transactions unless sold under buyback rules.

• Foreign Investors: NRIs selling unlisted shares face TDS at 10% for LTCG and at applicable slab rates for STCG.

• Exemptions: No exemptions under Section 112A (which applies to listed shares).

Understanding LTCG and STCG taxation on unlisted shares helps investors make informed decisions. Planning your investments while considering indexation, tax brackets, and loss set-off strategies can significantly impact net returns.

For expert guidance on buying or selling unlisted shares, reach out to Tathya Capital today!