Unlisted share investments in India have become popular among investors looking to benefit from higher growth potential before companies list their shares for trading in stock exchanges. While return potential can be profitable, it is equally necessary to be familiar with the tax aspects of unlisted shares. Their tax treatment is significantly different from that of listed shares, and unfamiliarity can attract undesired tax liabilities or non-compliances.
In this blog, we’ll break down everything you need to know about capital gains tax on unlisted shares, holding periods, applicable rates, exemptions, and reporting rules, so you can make informed investment decisions.
Why Unlisted Shares Should be Taxed
Unlike listed securities, unlisted shares are privately traded through dealers, platforms, or directly between investors. Since there is no centralized trading system, the Income Tax Department applies specific rules to ensure tax compliance. Knowing these rules not only helps you plan your exit better but also allows you to optimize your gains by using legitimate tax-saving strategies.
Holding Period for Unlisted Shares
Holding period will determine whether your gains are liable for short-term capital gains (STCG) or long-term capital gains (LTCG) taxation:
- Short-term capital gains (STCG): If you are in possession of unlisted shares for less than 24 months, profits will be considered to be short-term capital gains.
- Long-term capital gain (LTCG): If you keep them for 24 months and above, then your returns will be from the long-term capital gains.
While that 24-month rule is distinct from listed shares, wherein the cut-off is merely 12 months.
Tax Rates on Unlisted Shares
Here's how they are taxed:
- STCG on Unlisted Shares: Treated at the applicable individual's income tax slab rate (up to 30% plus surcharge and cess).
- LTCG from Unlisted Shares: Taxed at 20% with indexation benefit (plus applicable surcharge and cess).
Indexation allows you to adjust the purchase price for inflation, thereby reducing your taxable gains.
Dividend Income from Unlisted Shares
If the company pays out dividends, the dividend received is subject to tax in the investor's own slab rate. No longer do corporations give out Dividend Distribution Tax (DDT), therefore investors need to report this receipt under "Income from Other Sources" of their ITR.
Taxation for Non-Resident Investors (NRI)
For NRIs buying unlisted shares in India, the regulations are somewhat different:
- STCG: 30% (along with surcharge and cess).
- LTCG: Subject to tax at 10% without.
Moreover, NRIs should be in conformity with FEMA guidelines and TDS (withholding tax) at settlement of shares.
Fair Market Value (FMV) and Taxation
While gifting or transferring unlisted securities, Fair Market Value (FMV) is of paramount significance. The Income Tax Act has laid down methodologies of valuation (such as Net Asset Value or Discounted Cash Flow method) to find out FMV so that investors may not under-value their profits.
Reporting of Unlisted Shares in ITR
From FY 2018-19, investors of unlisted shares are required to disclose them in their Income Tax Return (ITR). The disclosure includes:
- Name of the company
- PAN of the company
- Number of shares owned
- Holding period and price of purchase
Failure to disclose can invite punishment and warnings from the Income Tax Department.
Exit Strategies and Tax Planning
To reduce tax outflow, investors may:
- Timing their exits – Staying for more than 24 months ensures LTCG benefits.
- Utilize indexation – Lowers reportable capital gains substantially.
- Set off of losses – Short-term capital loss from unlisted shares can be set off against other capital gains.
- Gift plans to be considered – Giving shares to relatives in the lowest tax classes can reduce overall tax outflow (treating FMV requirements).
Key Insights for Investors
| Aspect |
Tax Treatment / Rule |
| Lock-in period for LTCG |
24 months or more |
| STCG taxation |
As per income tax slab rates |
| LTCG taxation |
20% with indexation (10% without indexation for NRIs). |
| Dividend tax |
It is paid at investors' hands |
| Disclosure |
Reporting requirement of unlisted shares in ITR |
You must be knowledgeable in such regulations before buying or selling Indian unlisted shares to prevent losing your gains to bad planning.
Conclusion
While changes Unlisted shares give investors the chance to be part of a firm's growth narrative even before it enters the mainstream. But the taxability of unlisted shares in India is complicated as against listed securities. If you learn capital gains tax, tax on dividend, and reporting obligations, you can protect your returns and remain up to date. If buying into or selling out of unlisted shares is of interest to you, it is recommended that you talk to a professional tax advisor to give you appropriate personal advice.
Frequently Asked Questions (FAQs)
The holding period for unlisted shares is calculated from the date of acquisition (purchase, allotment, or gift) to the date of transfer or sale. If you hold the shares for less than 24 months, they are treated as short-term capital assets. If held for 24 months or more, they qualify as long-term capital assets eligible for indexation benefits.
Yes, indexation is allowed on long-term capital gains (LTCG) from unlisted shares for residents. This means the cost of acquisition is adjusted for inflation using the Cost Inflation Index (CII), reducing taxable gains. However, for NRIs, LTCG on unlisted shares is usually taxed at a flat 10% without indexation benefit.
Yes, gifting unlisted shares can attract taxation under the Income Tax Act. If the Fair Market Value (FMV) of gifted shares exceeds ₹50,000 and they are received from a non-relative, the entire value is treated as "Income from Other Sources" in the recipient’s hands. However, gifts to relatives (as defined in the Act) are exempt.
Since FY 2018-19, disclosure of unlisted shareholding in the Income Tax Return is mandatory. Non-disclosure may invite penalties, notices, or scrutiny from the Income Tax Department. Required details include the company’s name, PAN, number of shares, cost of acquisition, and holding period.
Yes. Short-term capital losses (STCL) from unlisted shares can be set off against both short-term and long-term capital gains. However, long-term capital losses (LTCL) can only be adjusted against long-term capital gains. If losses remain unadjusted, they can be carried forward for up to 8 assessment years to offset future capital gains.