Taxation on Capital Gains from Unlisted Shares: A Detailed Guide

What Are Unlisted Shares?

Investing in unlisted shares has become increasingly popular among High Net-Worth Individuals (HNIs), startup investors, private equity participants, and early-stage backers. These shares often offer long-term growth potential, access to high-quality private companies, and opportunities before public listing.

However, investors must understand the tax implications before buying or selling unlisted shares. The taxation rules differ significantly from listed shares, especially regarding holding periods, capital gains calculation, and tax rates.

This article provides a complete breakdown of taxation on capital gains from unlisted shares in India, how the gains are calculated, and how taxation works after listing.

Unlisted shares are equity shares of companies that are not traded on recognised stock exchanges such as NSE or BSE. These may include:

• Shares of private limited companies

• Pre-IPO shares of companies planning to list

• ESOP shares allotted by startups

• Shares of companies delisted from stock exchanges

Since they are not freely traded on public markets, their taxation is governed under specific income-tax provisions.

Taxation on Capital Gains from Unlisted Shares in India

Capital gains tax applies when an investor sells unlisted shares at a profit. The rules differ based on the holding period, which determines whether the gain is Short-Term or Long-Term.

Holding Period Rules for Unlisted Shares

a) Short-Term Capital Gain (STCG)

Unlisted shares are considered short-term if held for less than 24 months.

b) Long-Term Capital Gain (LTCG)

• They are considered long-term if held for 24 months or more.

• This is different from listed shares, where the LTCG holding period is only 12 months.

Tax Rates on Unlisted Shares

a) STCG Tax on Unlisted Shares

Short-term capital gains from unlisted shares are taxed at the investor's applicable income tax slab rate.

For HNIs in higher tax slabs, STCG may be taxed at 30% plus applicable surcharge and cess.

b) LTCG Tax on Unlisted Shares

Long-term capital gains on unlisted shares are taxed at:

20% with indexation benefit

Indexation adjusts the cost of acquisition based on inflation, reducing taxable gains.

How to Calculate Capital Gains on Unlisted Shares

Capital gains are calculated using the following formula:

Capital Gain = Sale Price – Indexed/Non-Indexed Cost of Acquisition – Transfer Expenses

a) STCG Calculation

If shares are held < 24 months:

• No indexation

• Tax at slab rate

b) LTCG Calculation with Indexation

If shares are held ≥ 24 months:

• Apply Cost Inflation Index (CII)

• Tax at 20%

Indexed Cost of Acquisition = Original Cost × (CII of Year of Sale / CII of Year of Purchase)

Tax on Unlisted Shares After Listing

Many investors ask: What is the tax on unlisted shares after listing?

Scenario 1: Shares bought unlisted and sold after listing

If shares were purchased as unlisted shares and sold after the company lists on an exchange:

• The holding period rules remain the same (24 months for LTCG).

• Taxation continues as unlisted share taxation, not listed share taxation.

• LTCG will still be taxed at 20% with indexation, even if sold on the stock exchange.

Scenario 2: Shares allotted at IPO and sold post-listing

These are treated as listed shares and taxed accordingly.

Taxation for ESOPs and Startup Shares

Many startup employees receive ESOPs (Employee Stock Option Plans). Taxation applies in two stages:

1. At Exercise – Treated as perquisite under salary

2. At Sale – Capital gains based on period held since exercise

ESOPs of unlisted companies follow unlisted share taxation rules.

Special Cases and Considerations

a) Buyback of Unlisted Shares

Buyback tax is paid by the company; investors do not pay capital gains tax.

b) Shares Received as Gift

Gifts are tax-free from specified relatives but taxable otherwise.

c) Inheritance and Succession

No tax at the time of inheritance.

Capital gains apply when the heir sells, using the previous owner’s purchase cost.

Reporting Requirements Under Income Tax Rules

Investors must disclose:

• Unlisted shareholding details in Income Tax Return (ITR)

• Schedule AL for assets if income exceeds specified thresholds

• Particulars required if shareholder in foreign unlisted companies

• Failure to report may lead to scrutiny or penalties.

Why Taxation on Unlisted Shares Matters for Investors

Understanding tax rules helps investors:

• Estimate potential post-tax returns

• Optimise investment planning

• Decide when to sell shares

• Use indexation effectively

• Maintain compliance

HNIs often rely on unlisted shares for long-term wealth creation; therefore tax awareness becomes crucial.

Practical Example of Capital Gains Calculation

Example: LTCG on Unlisted Shares with Indexation

• Purchase Price: Rs 1,00,000

• Year of Purchase CII: 280

• Year of Sale CII: 348

• Sale Price: Rs 3,50,000

Indexed Cost = 1,00,000 × (348/280) = 1,24,285

Capital Gain = 3,50,000 – 1,24,285 = 2,25,715

LTCG Tax = 20% of 2,25,715 = Rs 45,143 (plus cess)

Tax Planning Tips for Unlisted Share Investors

• Hold shares for over 24 months to benefit from indexation

• Track the Cost Inflation Index annually

• Maintain documentation for valuation and purchase

• Consider tax implications before participating in buybacks or secondary sales

• Understand post-listing taxation for pre-IPO shares

Conclusion

Unlisted shares offer significant opportunities but come with complex tax rules. Investors must understand holding periods, indexation benefits, and tax rates to make informed decisions. Whether shares are bought privately, received as ESOPs, or acquired in a pre-IPO round, capital gains taxation directly impacts final returns. With correct planning and compliance, investors can manage these obligations effectively.

FAQs

1. What is the tax rate on unlisted shares in India?

Short-term gains are taxed at slab rate; long-term gains are taxed at 20% with indexation.

2. How long must unlisted shares be held to qualify for long-term capital gains tax?

At least 24 months.

3. Are unlisted shares taxed differently after listing?

No. Taxation remains based on unlisted share rules if originally acquired as unlisted.

4. How do you calculate capital gains on unlisted shares?

By subtracting the indexed or non-indexed cost of acquisition and transfer expenses from the sale value.

5. Do ESOPs of private companies follow the same taxation rules?

Yes. ESOP taxation for capital gains follows the same rules as unlisted shares.

6. Is buyback of unlisted shares taxable?

No, the company pays buyback tax, not the investor.