Investing in unlisted companies provides unique opportunities that are often not available with listed stocks. These investments can yield significant returns, but it’s essential to navigate their taxation implications effectively to maximise profits and ensure compliance with tax regulations.

Capital Gains Tax on Unlisted Shares

When you invest in unlisted shares, understanding how capital gains taxes apply is crucial. Capital gains are categorised into long-term and short-term gains based on the holding period of the shares.

Long-Term Capital Gains (LTCG) Tax

If you hold unlisted shares for more than 24 months, any profit from the sale is considered long-term capital gains. LTCG on unlisted shares is taxed at a flat rate of 20% with the benefit of indexation. Indexation adjusts the purchase price of the shares for inflation, reducing the taxable amount and thereby minimising the tax burden.

Short-Term Capital Gains (STCG) Tax

Holding unlisted shares for up to 24 months results in short-term capital gains. STCG is taxed according to the investor’s applicable income tax slab for the year in which the gains are realised. These gains are added to the investor’s total taxable income and taxed accordingly.

An important point to note about unlisted shares taxation is that there is no Securities Transaction Tax (STT) on these stocks.

For computing the gains, the sale price would be considered as higher of Fair market value and the actual sale price.

Concept of Fair Market Value and Section 50CA

For unlisted stocks, the Fair Market Value (FMV) is determined by the company’s merchant banker.

Below FMV Sale: If the investor transfers or sells stocks below this FMV, the FMV is considered the sale consideration for calculating capital gains under Section 50CA of the Income Tax Act. The actual selling price is irrelevant in this case.

At or Above FMV Sale: If the selling price is equal to or higher than the FMV, the actual selling price is taken as the sale consideration, and Section 50CA does not apply.

Tax on Buyback of Shares

If the company whose unlisted shares you hold decides to buy back its shares, the gains made on the buyback will be taxed as capital gains. The tax treatment will follow the same rules as mentioned above based on the holding period of the shares.

Gift Tax

Transferring unlisted shares as a gift to another person may attract gift tax on any gains made from the transfer. However, there is an exemption for gifts received from close relatives, such as spouses, parents, siblings, etc. The exemption is up to ₹50,000 under Section 56(2)(x) of the Income-tax Act, 1961 (ITA).

Dividend Income

If the unlisted company declares dividends on its shares, the dividend income received by the investor will be taxable at the applicable tax rate.

Transition from Unlisted to Listed Shares

Once a company is listed on a stock exchange, the unlisted or pre-IPO shares get locked for six months. If you had purchased stocks of an unlisted company and sold them on the stock exchange after listing with a total holding period of 1 year and above, you will need to pay the same tax that you pay for listed securities – 10% long-term capital gains without indexation.

Set-off and Carried Forward of Losses

Long Term Capital Gain (LTCG) Loss from Shares

Short Term Capital Gain (STCG) Loss from Shares

In summary, while investing in unlisted shares can be rewarding, understanding the tax implications is crucial. By familiarising yourself with the capital gains tax rules, buyback implications, gift taxes, dividend income, and filing procedures, you can make informed investment decisions and maximise returns on your investments.

It’s important to remember that tax laws and rates can change. Therefore, consulting with a qualified tax advisor or Chartered Accountant is essential to understand the specific tax implications based on your individual circumstances and the most current tax regulations.

 

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