Taxation on Unlisted shares in India : Capital Gains Insights

What are Unlisted Shares?

Unlisted Shares are shares of companies that are not listed on any identified stock exchange, such as the NSE or BSE. These shares can be of startups, private companies, or companies that are preparing for an IPO. Unlike publicly traded stocks, unlisted shares are traded privately, through over-the-counter (OTC) markets or private placements, making them fairly illiquid but potentially rewarding for investors willing to take the risks.

Key Changes in Taxation on Unlisted Shares in India (Old vs New Regime):

Benefits of Unlisted Shares:

Investing in unlisted shares can offer several benefits, having:

• 1. Early Investment Opportunities : Investors will get a chance to early invest in companies with decisive growth potential, usually before they go public.
• 2. Diversification: Unlisted shares permit investors to diversify their portfolios, spreading out risk above the conventional stock market.
• 3. Higher Returns Potential : Unlisted shares often yield higher returns over time. Due to the illiquid nature and growth potential of these companies.

How to Purchase Unlisted Shares in India:

Purchasing Unlisted Shares In India usually requires dealing with a stockbroker or platform specializing in unlisted markets. Here are the steps:

• 1. Choose a Reputable Platform: Look for registered brokers or financial platforms with knowledge of unlisted shares.
• 2. Verify the Company’s Details: Before purchasing unlisted shares, complete thorough due diligence on the company’s fundamentals, growth potential, and market position.
• 3. Complete the Transaction: Since these shares aren’t traded on an identified exchange, transactions are usually done through private negotiations or specific brokers.
• 4. Hold for Potential Listing: Some unlisted shares ultimately get listed on the stock market. Having such shares could deliver lucrative returns post-listing.

Critical Norms of Taxation On Unlisted Shares in India:

1. Capital Gain Taxation on Unlisted shares: These unlisted shares are subject to capital gains tax; it depends on the holding period. Gains are categorized as either long-term or short-term. Gains from unlisted shares held for more than 24 months are taxed at 12.5% without indexation. Short-term capital gains on unlisted shares sold within 24 months are taxed according to the investor’s income tax slab rate.

2. Gift Tax: Relative gifts are exempt from taxes, but the profits from their sale of shares are subject to taxes just like any other asset. The person selling the gifted shares is taxed the same as the person selling his shares. It is important to remember that the original owner's cost price will be used to calculate capital gains for the share.

3. Reporting Requirements: Unlisted shares must be declared in the Income Tax Return (ITR) under specific heads to provide tax compliance.

Computation of Capital Gains in the Unlisted Market:

For tax objectives, the gains from unlisted shares are computed by deducting the acquisition price (purchase price) from the sale price. Any additional charges, such as brokerage fees, can also be deducted. The holding term is important in determining whether the gains are classified as long-term or short-term.

Capital Gains = Sales - Purchases

Capital Gain Taxation on Unlisted Shares in India:

Capital Gain Taxation on unlisted shares in India is based on the period of holding. This tax is indexed into long-term and short-term capital gains.

1. Long Term Capital Gain Taxation on Unlisted Shares

The gains are permitted as long term capital gains Tax on Unlisted shares . If the unlisted shares are held for more than 24 months, the appropriate tax rate is 12.5% without indexation benefit. Indexation adapts the investment cost according to inflation, thus decreasing the taxable gain amount. This tax structure benefits investors holding unlisted shares over extended periods, as it helps minimize the tax liability on gains and pay lower taxes than short-term gains.

For the listed shares long-term holding period remains more than 12 months from the date of purchase. The taxes on LTCG (Long-Term Capital Gains) from listed shares are exempt for amounts up to ₹1.25 lakh. Gains exceeding ₹1.25 lakh are taxed at a rate of 12.5%.

2. Short Term Capital Gain Taxation on Unlisted Shares

Applying Short Term Capital Gains Tax on Unlisted Shares , Within 24 months of purchasing, the unlisted shares are sold. These gains are added to the investor’s total income and taxed according to the appropriate income tax slab rate, making short-term investments in unlisted shares potentially more expensive in terms of tax liability.

For the listed shares short-term holding period remains selling shares less than 12 months from the date of purchase. If the investor sells listed shares within 12 months of the purchase, he or she is liable to pay a tax rate of 20% on the capital gains without any other benefits.

The old tax regime permits deductions and exemptions that can help to reduce taxable income, mainly for high-net-worth investors. However, deductions are limited under the new regime, while tax rates may be simplified for some investors.

How to Declare Unlisted Shares in ITR:

Investors must include information about their unlisted shareholdings on their income tax return. For this reason, only the ITR2 and ITR3 forms are appropriate. Gains from the selling of shares should be reported in ITR3 if the individual also has business income. On the other hand, gains must be reported in ITR2 if there is no business income.

Long-term Capital Gains must be revealed under Point B9 of the same schedule, whereas short-term capital gains should be reported under Point A5 of Schedule CG.

Important Points to Consider Before Filing an ITR:

Before filing your Income Tax Return (ITR), keep the following in mind:

Declaration of Securities Holdings: One must disclose details about the opening balance of securities as of the first day of the fiscal year, any shares bought and sold during the year, and the closing balance of securities as of the fiscal year's end in Point (j) of Part AGeneral.

Set Off Rules for Capital Losses : Losses incurred from the sale of shares cannot be adjusted against other types of income, such as salary, income from house property, business income, or any other form of earnings. These losses can only be offset against capital gains.

Treatment of Capital Losses:

Long-term capital losses (LTCG) from the sale of unlisted shares can only be set off against Long-term Capital Gains.

However, short-term capital losses (STCG) can be adjusted against both long-term and short-term capital gains.

If any losses remain after the setoff, they can be carried forward for up to 8 years and used to offset capital gains in subsequent years.

Income Tax On Capital Gains From Unlisted Shares That Are Sold After Getting Listed:

The tax rates that apply to the purchase and sale of listed shares will also apply to these transactions. In particular, long-term capital gains (from transactions made after more than a year) will be subject to 12.5% tax after exceeding the Rs. 1.25 lakh maximum in any given fiscal year. On the other hand, 20% tax will be applied to short-term capital gains (from sales made within a year).

Taxation of Gifted Unlisted Shares:

Relative gifts are exempt from taxes, but the profits from their sale are subject to taxes just like any other asset. A person who sells their shares is still subject to the same taxes. It is important to remember that the original owner's cost price will be used to calculate capital gains for the share. The original purchase date is included in the holding period when the purchaser sells these shares, which enables them to take advantage of the long-term capital gains tax on unlisted shares if the shares are held for more than 24 months.

Final Thoughts on Taxation of Unlisted Shares in India:

To pay Taxation On Unlisted Shares In India, one must be notified of certain rules regarding capital gains, holding terms, and ITR declaration. For those who are willing to invest for long periods, unlisted shares offer special tax advantages, with STCG taxed according to the income tax slab and long-term gains taxed at 20% without indexation benefits. Investors who own unlisted shares must make sure that reporting requirements have been fulfilled to avoid tax liabilities.

Although it has its own set of tax laws, investing in Unlisted Shares diversifies portfolios and shows growth potential. From unlisted shares, people can maximize their possible earnings while maintaining complete compliance with Indian tax laws by being aware of these tax consequences and properly declaring investments.

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