Important Keyword: Capital Gains, ITR-2, Trading Income, Unlisted Shares.
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Tax on Unlisted Shares
Investing in unlisted shares means buying ownership stakes in companies that haven’t gone through the process of making their shares available for public trading through an Initial Public Offering (IPO). Unlike shares of listed companies that are traded on stock exchanges, unlisted share is not accessible to the general public for buying and selling. Consequently, determining their value and understanding the tax implications can be more complex compared to publicly traded shares.
Unlisted shares are typically bought and sold through private transactions or platforms known as over-the-counter (OTC) markets. In these scenarios, buyers and sellers negotiate directly, and there is often less transparency and liquidity compared to trading on stock exchanges.
When it comes to taxation, the gains or profits made from selling unlisted shares are subject to capital gains tax, similar to listed shares. However, determining the cost of acquiring these shares and establishing their fair market value can pose challenges, especially since there isn’t a readily available market price. Investors may need to employ various valuation methods, such as the net asset value approach or discounted cash flow analysis, to assess the worth of unlisted shares for tax purposes.
Furthermore, investors should be aware of the tax implications associated with the duration of their investment, as different tax rates may apply depending on whether the gains are categorized as short-term or long-term capital gains.
While investing in unlisted share can offer opportunities for portfolio diversification and potentially higher returns, it’s essential for investors to carefully evaluate the risks and complexities involved, including valuation challenges and tax considerations, before making investment decisions in this domain.
What are Unlisted Shares?
Unlisted shares represent ownership in companies not traded on recognized stock exchanges. Unlike their listed counterparts, which are openly traded, unlisted shares are typically held by private entities like startups or privately-owned firms. Individuals investing in these shares often include founders, early backers, or employees of the company.
While unlisted shares offer potential returns, they come with unique considerations and risks. Valuing them can be subjective, and finding buyers for these shares may be challenging due to limited market activity. Additionally, compared to publicly traded companies, information about unlisted firms may be less accessible.
Taxation on the sale of unlisted shares differs from that of listed shares due to the absence of Securities Transaction Tax (STT) since they are not traded on recognized stock exchanges. For determining tax liability, the holding period for unlisted shares is considered 24 months:
- Long-Term Capital Gain (LTCG): Profits from selling unlisted share held for over 24 months are classified as LTCG.
- Short-Term Capital Gain (STCG): Gains from selling unlisted share held for up to 24 months are treated as STCG.
Income Tax on Unlisted Shares
| Capital Gains | Holding Period | Taxability |
| Short Term Capital Gains | < 24 Months | Slab rates |
| Long Term Capital Gains | > 24 Months | 20% under section 112 |
For the calculation of capital gains on unlisted shares, determining the sales consideration and purchase value is crucial.
Sales Consideration:
The Fair Market Value (FMV) dictates the sale value of unlisted share, regardless of market conditions. If the transfer occurs below the FMV, section 50CA of the Income Tax Act mandates using the FMV as the sales consideration. Conversely, if the transfer happens at or above the FMV, the original transfer value is considered.
Sales consideration = Higher of Actual sales value or FMV as on the date of transfer
Cost of Acquisition:
The purchase value for unlisted share is the actual price paid by the investor during the purchase. Moreover, the benefit of Indexation is applicable for unlisted shares.
Let’s illustrate this with an example:
Mr. Swapnil acquired unlisted share for INR 10,000 on 30th September 2020 and sold them for INR 15,000 on 31st December 2023. The FMV on the sale date was INR 14,000. Since the actual transaction price exceeds the FMV, the sales consideration is INR 15,000. Additionally, as the holding period exceeds 24 months, the shares qualify as long-term capital assets.
| Particulars | Amount (INR) |
| Sales Consideration Higher of: Actual sale value i.e.150 or, FMV on date of sales i.e. 140 | 15,000 |
| Purchase Value | 10,000 |
| Indexed Purchase Value | 11,561 |
| Long Term Capital Gains (15,000 – 11,561) | 3,439 |
| Tax @20% under section 112 | 688 |
ITR Form, Due Date, and Tax Audit Applicability
For reporting income from the sale of unlisted stocks, traders should file ITR 2, specifically designed for capital gains income.
The due dates for filing income tax returns are as follows:
- July 31st: For traders not subject to tax audit
- October 31st: For traders subject to tax audit
Tax Audit is not applicable for income from the sale of unlisted stocks as it falls under capital gains income. Therefore, traders are exempt from tax audit requirements in this regard.
Carry Forward Loss on Sale of Unlisted Shares
Investors have the flexibility to set off short-term capital losses against both short-term and long-term capital gains. Any remaining loss after set off can be carried forward for up to 8 years and utilized against both short-term and long-term capital gains within this period.
Long-term capital losses, on the other hand, can only be set off against long-term capital gains. Similarly, any unabsorbed long-term capital losses can be carried forward for up to 8 years and utilized against long-term capital gains during this period.
Read More: Tax on Gifted Shares & Securities
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Official Income Tax Return filing website: https://incometaxindia.gov.in/
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