Tax Implications of Investing in Unlisted Shares: What You Need to Know

Investing in unlisted shares can be an exciting way to diversify your portfolio, but it’s important to understand the tax rules that come with it. In India, unlisted shares are treated differently from listed ones, and this can impact how much tax you pay on your earnings. Whether it’s about holding periods, capital gains, or the tax rates themselves, knowing the basics can help you plan better and avoid surprises when it’s time to file your returns. Let’s break it down so you can navigate this investment option with more clarity.

When Do You Need to Pay Taxes?

If you're investing in unlisted shares, it's important to understand how taxes apply. Taxes on these shares depend on how long you hold them before selling. The gains are classified as either long-term or short-term, and each has different tax rules.

Long-Term Capital Gains on Unlisted Shares

If you hold unlisted shares for more than 24 months, they are considered a long-term asset. The profits you make from selling these shares are taxed at a fixed rate of 20%, but you can use indexation to adjust the purchase cost for inflation. This adjustment can help reduce the taxable amount, lowering the tax you owe.

For instance, if you bought unlisted shares a few years ago and sell them now, you would calculate your gains using the indexed cost of acquisition. Since these shares are not traded on the stock exchange, you don’t have to pay the Securities Transaction Tax (STT).

Short-Term Capital Gains on Unlisted Shares

Unlisted shares held for less than 24 months are treated as short-term assets. Any profits from selling these shares are added to your total income and taxed based on your income tax slab rate. Unlike long-term gains, short-term gains do not qualify for any indexation benefits.

For example, if you sell unlisted shares after holding them for a year, the gains will be added to your annual income and taxed according to the rate that applies to your income bracket. Since these shares are unlisted, the STT does not apply here either.

By understanding these rules, you can better plan your investments in unlisted shares and manage the tax you’ll owe when you sell them.

Tax Comparison on Unlisted Shares (Old vs New Regime)

How to Declare Unlisted Shares in Your Income Tax Return (ITR)

If you hold unlisted shares, it's important to include them in your income tax return (ITR). This requirement applies even if you haven’t bought or sold any unlisted shares during the financial year. The disclosure ensures transparency about your investments and their tax implications.

Which ITR Forms Should You Use?

• ITR-2: Use this form if you do not have income from a business but need to report gains from the sale of unlisted shares.
• ITR-3: If you have business income along with gains from selling unlisted shares, this form is applicable.

How to Report Capital Gains from Unlisted Shares

• Short-Term Capital Gains (STCG): Report these gains in the Schedule CG under Point A5. These are gains from shares sold within 24 months of purchase.
• Long-Term Capital Gains (LTCG): These need to be disclosed under Point B9 in the Schedule CG. LTCG applies to shares held for more than 24 months before selling.

Disclosure Even Without Transactions

Even if you didn’t buy or sell unlisted shares during the year but continue to hold shares purchased in earlier years, you still need to mention them in your ITR. This is a mandatory requirement, ensuring that all unlisted shareholdings are accounted for in your tax filings.

By including these details in your ITR, you comply with tax regulations while maintaining a clear record of your investments.

Tax on Capital Gains When Unlisted Shares Are Sold After Being Listed

When unlisted shares are sold after they get listed, the tax treatment is the same as for regular listed shares. If you sell the shares after holding them for over a year, any profit beyond ₹1.25 lakh in a financial year is considered a long-term capital gain and taxed at 12.5%. On the other hand, if you sell the shares within a year, the profit is treated as a short-term capital gain and taxed at 20%.

Tax on Gifted Unlisted Shares

If you receive unlisted shares as a gift from a relative, there’s no tax on the gift itself. However, if you sell the gifted shares, the profits will be taxed just like any other capital gain. It’s important to remember that the cost price used to calculate the gains will be the same amount the original owner paid for the shares. The holding period for capital gains taxation will also include the time the original owner held the shares.

Closing Thoughts

Investing in unlisted shares offers unique growth opportunities but comes with its own set of tax rules that you need to be aware of. Whether it’s understanding the distinction between long-term and short-term capital gains, handling the taxes on gifted shares, or making sure your tax filings are in order, staying informed is crucial. By taking the time to understand how taxes apply to your unlisted share investments, you can make more informed decisions and avoid any unexpected tax bills down the road. Clear knowledge of the tax process helps you diversify and manage your investments better and ensures that you stay on the right side of the law when it comes to your financial dealings.

Author Bio:

Saumil Patel oversees content marketing initiatives for InCred Money, where he and his team leverage his in-depth knowledge of emerging financial markets and his deep understanding of finance and investment strategies to craft compelling digital content that resonates with savvy investors. With a keen interest in alternative investments, Saumil combines his passion for finance with his sharp analytical skills to simplify complex financial concepts, making them accessible to a broader audience. Saumil is passionate about helping investors navigate the complexities of high-growth private companies. His expertise lies in creating insightful, data-driven content that empowers investors to diversify their portfolios and seize early-stage opportunities. His innovative strategies help InCred Money reach new audiences in the fintech space. Outside of work, he enjoys gaming and cricket, using strategic thinking in all aspects of his life.