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Understand the capital gains tax regulations for unlisted shares in India, including holding periods, tax rates, indexation benefits, reporting requirements, and related considerations.
Unlisted shares have become an increasingly important part of many investors’ portfolios, particularly in emerging markets like India. Unlike shares listed on recognised stock exchanges, unlisted shares do not trade publicly, which affects their valuation, liquidity, and taxation. Understanding the tax rules on capital gains arising from unlisted shares is essential for investors to ensure compliance and optimise their tax liabilities.
This article covers the taxation framework specific to unlisted shares, distinguishing between short-term and long-term capital gains, the use of indexation benefits, other tax considerations including dividends and buybacks, and the reporting requirements under Indian tax laws.
Unlisted shares refer to equity shares of companies that are not listed or traded on any recognised stock exchange such as the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). These shares typically belong to private companies or startups that have not gone public.
Lack of Public Trading: Unlike listed shares, unlisted shares do not have a public market for continuous buying and selling.
Valuation Challenges: Determining the fair market value can be difficult due to the absence of market price.
Transfer Restrictions: Transfers may be subject to company approval or other contractual limitations.
Investors in unlisted shares often include promoters, employees through ESOPs, venture capitalists, and early-stage investors who seek exposure to private firms with growth potential.
Early-Stage Growth Potential: Unlisted companies are often in their growth phase. Investing early allows investors to benefit from substantial capital appreciation when these companies expand, scale, or go public (IPO).
Pre-IPO Gains: Investors in unlisted shares may gain significantly if the company gets listed on a stock exchange. The valuation at IPO is often higher, allowing early investors to book profits.
Portfolio Diversification: Including unlisted shares in an investment portfolio adds an alternative asset class, reducing overall market correlation and diversifying risk.
Long-Term Wealth Creation: Due to limited liquidity, unlisted shares are usually held longer, promoting a long-term investment mindset which can lead to substantial wealth creation if invested in the right businesses.
Attractive Valuations: Compared to listed peers, unlisted companies may be available at more reasonable valuations, especially if they are not yet well-known in the market.
Access to Niche Sectors: Unlisted shares provide exposure to emerging or niche sectors — such as fintech, space tech, or new-age consumer brands — that may not yet be represented in the listed market.
Capital gains arising from the transfer of unlisted shares are subject to specific provisions under the Income Tax Act, 1961. The classification of capital gains into short-term or long-term depends primarily on the holding period.
Short-Term Capital Gains (STCG): Gains from shares held for 24 months or less.
Long-Term Capital Gains (LTCG): Gains from shares held for more than 24 months.
This 24-month holding period threshold is distinct from listed shares, where the threshold is 12 months.
If unlisted shares are held for more than 24 months before being sold, the gains qualify as LTCG.
LTCG on unlisted shares is taxed at 12.5% without indexation . Indexation allows adjustment of the cost of acquisition for inflation, reducing taxable gains.
The indexed cost of acquisition is calculated as follows:
Indexed Cost of Acquisition = (Cost of Acquisition × Cost Inflation Index of Year of Transfer) / Cost Inflation Index of Year of Purchase
Suppose an investor bought unlisted shares for ₹1,00,000 in the financial year 2015-16 and sold them for ₹1,80,000 in 2024-25. Using the Cost Inflation Index (CII) for 2015-16 as 254 and for 2024-25 as 348 (hypothetical values):
Indexed Cost = (1,00,000 × 348) / 254 = ₹1,37,007
Capital Gain = Sale Price - Indexed Cost = ₹1,80,000 - ₹1,37,007 = ₹42,993
Tax Liability = 20% of ₹42,993 = ₹8,599
The indexation benefit reduces the taxable gain from ₹80,000 to ₹42,993.
For shares held for 24 months or less, the gains are classified as STCG.
STCG on unlisted shares is taxed at the individual's applicable income tax slab rate. There is no indexation benefit available for STCG.
If the same shares in the previous example were sold within 24 months for ₹1,80,000, the entire gain of ₹80,000 would be added to the investor’s income and taxed as per the slab rate.
Dividends received from unlisted companies are taxable in the hands of the shareholder as per the applicable income tax slab.
Transfer of unlisted shares as a gift is taxable if the aggregate fair market value exceeds ₹50,000, except for transfers between specified relatives.
If a company buys back its unlisted shares, the shareholder may be subject to capital gains tax on the difference between the buyback price and the cost of acquisition.
Accurate documentation is critical for compliance:
Valuation Report: Unlisted shares require valuation by a registered valuer to determine fair market value for capital gains reporting.
Transaction Proofs: Sale deeds, share transfer forms, and payment receipts.
Tax Return Filing: Capital gains must be disclosed under the appropriate heads in the Income Tax Return (ITR).
Maintaining clear records helps avoid disputes and ensures proper tax computation.
Tax laws related to unlisted shares have evolved to enhance transparency:
Mandatory reporting of unlisted share transactions and capital gains.
Strengthened guidelines on valuation methods and documentation.
Introduction of TDS provisions on transfer of certain unlisted shares under specific circumstances.
Keeping abreast of regulatory changes is important for compliant tax planning.
Taxation on unlisted shares involves distinct rules compared to listed securities, primarily due to differences in holding period thresholds and valuation challenges. Understanding the capital gains tax framework, including the application of indexation, is essential for investors dealing in unlisted shares. Proper record-keeping and timely reporting further aid in fulfilling compliance requirements.
Investors are encouraged to familiarise themselves with these provisions to manage tax liabilities effectively and avoid unintended penalties.
This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
Sources
Income Tax Department of India: https://www.incometaxindia.gov.in/
Securities and Exchange Board of India (SEBI): https://www.sebi.gov.in/
Ministry of Finance, Government of India: https://www.finmin.nic.in/
National Stock Exchange of India (NSE): https://www.nseindia.com/
Bombay Stock Exchange (BSE): https://www.bseindia.com/
ClearTax – Tax on Unlisted Shares: https://cleartax.in/s/unlisted-shares-taxation
IndiaFilings – Capital Gains Tax on Unlisted Shares: https://www.indiafilings.com/learn/taxation-of-unlisted-shares/
Unlisted shares are equity shares of companies not listed on recognised stock exchanges. They typically have less liquidity and different tax rules compared to listed shares.
Capital gain is the difference between the sale price and the purchase price, adjusted for indexation in case of long-term holdings.
Long-term capital gains on unlisted shares are taxed at 20% with indexation benefits.
Indexation adjusts the purchase price for inflation, reducing the taxable gain and hence the tax liability.
Yes, dividends from unlisted shares are taxable in the hands of the investor as per their income tax slab.
Documents include share transfer deeds, valuation reports by registered valuers, payment receipts, and contract notes if applicable.
