Income Tax on UNLISTED SHARES

Summary

In today’s world, taxation applies to almost everything, including the purchase and sale of shares. However, the tax treatment varies between listed and unlisted shares. The calculation of long-term capital gains (LTCG) and short-term capital gains (STCG) in unlisted shares differs from that of listed shares. In this article, we will explore how taxation on unlisted shares is computed and how they are taxed.

Computation Of Capital Gains In Unlisted Market

To determine capital gains on unlisted shares, the fair market value (FMV) must first be established. For taxation purposes, the sale value will be the higher of the two: actual sale price or FMV. From this calculated value, the cost of acquisition and any expenses related to the transfer will be deducted to compute capital gains.

How Are Unlisted Shares Taxed?

Unlisted shares are generally bought and sold through brokers or direct sellers in the unlisted market. Unlike listed shares, these transactions do not attract Securities Transaction Tax (STT).

The taxation of unlisted shares is determined based on the holding period of the investment. There are two types of capital gains based on the duration:

Long-Term Capital Gains (LTCG)

• Unlisted shares are classified as a long-term capital asset if they are held for more than 24 months.

• The tax rate for long-term capital gains (LTCG) is 12.5% without indexation benefits (as per Budget 2024 changes).

• In contrast, listed shares are considered long-term if held for more than 12 months.

• Long-term capital gains (LTCG) on listed shares are tax-free up to ₹1.25 lakh per financial year, beyond which they are taxed at 12.5%.

Short-Term Capital Gains (STCG)

• Unlisted shares are classified as a short-term capital asset if they are held for 24 months or less.

• Short-term capital gains (STCG) on unlisted shares are taxed as per the investor’s income tax slab.

• In comparison, short-term capital gains (STCG) on listed shares (holding period of less than 12 months) are taxed at 20% without benefits.

Tax Comparison on Unlisted Shares (Old vs New Regime)

Budget 2024 introduced significant changes in the capital gains tax structure for various assets, effective from July 23, 2024. However, the Income Tax Bill, 2025, did not introduce any further changes to the capital gains tax regime.

How To Declare Unlisted Shares In ITR?

Investors must disclose information regarding unlisted shares in their income tax return (ITR). Only ITR-2 and ITR-3 are applicable for this purpose:

• If an individual has business income in addition to capital gains, these gains should be reported in ITR-3.

• If there is no business income, capital gains from unlisted shares should be disclosed in ITR-2.

For reporting capital gains:

• Short-term capital gains (STCG): Report under Point A5 in Schedule CG.

• Long-term capital gains (LTCG): Report under Point B9 in Schedule CG.

Even if an individual only holds unlisted shares purchased in prior years without any transactions in the current year, disclosure in the ITR remains mandatory.

Important Considerations

When filing an ITR, keep the following points in mind:

1. Details of Shareholding: Declare the opening balance, shares bought and sold during the year, and the closing balance of securities under Point (j) of Part A-General.

2. Capital Loss Set-Off Rules:

   • Losses from selling shares cannot be set off against salary, house property, business income, or other earnings.

   • Long-term capital loss (LTCL) from unlisted shares can only be set off against long-term capital gains (LTCG).

   • Short-term capital loss (STCL) can be set off against both long-term capital gains (LTCG) and short-term capital gains (STCG).

   • Unutilized capital losses can be carried forward for up to 8 years for set-off against future capital gains.

Taxation of Unlisted Shares That Get Listed

When unlisted shares are sold after the company gets listed, taxation rules align with those of listed shares:

• Long-term capital gains (LTCG) (sold after more than a year): Tax-free up to ₹1.25 lakh per year, beyond which 12.5% tax applies.

• Short-term capital gains (STCG) (sold within a year): Taxed at 20%.

Taxation of Gifted Unlisted Shares

• Gift from relatives: No tax liability for the recipient.

• Sale of gifted shares: Tax is levied like any other asset.

• Cost of acquisition: The original owner’s purchase price is considered for capital gains computation.

Conclusion

This article provides a comprehensive overview of how income tax applies to unlisted shares, how capital gains are computed, and what factors investors should consider while filing an ITR. While taxation on unlisted shares differs slightly from listed shares, the fundamental principles remain similar.

If you have any further queries or need assistance, feel free to reach out to us through our website. Our experts will be happy to help clarify your doubts.