Investing in unlisted shares can be an attractive option for those looking to diversify their portfolio and potentially earn higher returns. However, understanding the taxation of unlisted shares in India is crucial to ensure compliance and optimize tax liabilities. This guide provides an overview of the key aspects of unlisted shares taxation in India.
What are Unlisted Shares?
Unlisted shares are shares of companies that are not listed on any recognized stock exchange. These shares are typically traded over-the-counter (OTC) and include pre-IPO shares, delisted shares, and shares issued under employee stock option plans (ESOPs).
Taxation of Unlisted Shares
The taxation of unlisted shares in India involves several key considerations:
- Capital Gains Tax
- Short-Term Capital Gains (STCG): If unlisted shares are sold within 24 months of acquisition, the gains are considered short-term and taxed at the applicable income tax slab rates.
- Long-Term Capital Gains (LTCG): If unlisted shares are held for more than 24 months, the gains are considered long-term and taxed at a rate of 20% with the benefit of indexation. However, recent changes in the tax laws have removed the indexation benefit, and LTCG is now taxed at a flat rate of 12.5%.
- Fair Market Value (FMV) The fair market value of unlisted shares must be determined to calculate capital gains. The FMV is typically based on the price that the shares would fetch if sold in the open market.
- Cost of Acquisition The cost of acquisition for unlisted shares is the actual price paid by the investor. The benefit of indexation, which adjusts the purchase price for inflation, is available for unlisted shares held for more than 24 months.
- Reporting in Income Tax Returns (ITR) Capital gains from the sale of unlisted shares must be reported in the appropriate section of the Income Tax Return (ITR) forms. For individuals, this is typically done in ITR-2 or ITR-3, depending on the nature of their income.
Key Considerations
- Holding Period The holding period for unlisted shares to qualify as long-term assets is 24 months. This is longer than the 12-month holding period for listed shares.
- Tax Implications of ESOPs Employee stock options (ESOPs) are taxed at two stages: upon exercising the option and upon selling the shares. The difference between the fair value of the shares and the exercise price is taxed as a perquisite under the head “salaries”.
- Gifting of Shares Gifting of unlisted shares is not considered a transfer for capital gains tax purposes, provided the shares are not gifted to employees under ESOPs.
Conclusion
Understanding the taxation of unlisted shares is essential for investors to make informed decisions and comply with tax regulations. By being aware of the key aspects of unlisted shares taxation, investors can optimize their tax liabilities and ensure a smooth investment experience.
Disclaimer The information provided in this blog is for educational purposes only and should not be considered as financial or tax advice. It is essential to consult with a tax professional or financial advisor before making any decisions related to the taxation of unlisted shares.
