Tax Implications on Selling Unlisted Shares in India

In recent times, many startup companies and new ventures have started in India. Generally, founders or investors hold a substantial percentage of equity in those companies. But that equity shares usually fall under the category of unlisted shares and founders or investors have to pay hefty capital gain taxes when they sell off those unlisted shares. Well, if you are one of such founders or investors thinking of selling your unlisted shares. Then, this article is for you. We have made an attempt to answer common questions that taxpayers generally asked to us related to tax implications on selling unlisted shares in India.

So, without further ado let’s discuss. Happy reading!!

First, let’s understand 

What’s the difference between listed and unlisted shares?

 Listed shares are also known as “quoted shares” which means the shares quoted on any recognised stock exchange like NSE or BSE & are easily traded openly on the same. With regularity from time to time, the price of such shares is determined based on the transactions made in the ordinary course of business.

 Whereas, unlisted shares i.e, unquoted shares are the shares that are not listed and openly traded on any recognised stock exchange. These kinds of shares are usually issued by startup companies and acquired by private investors & founders. The price of unlisted shares is determined based on the valuation of the company.

Now, let’s understand 

How’s the taxability of unlisted shares is determined?

 As per Income Tax Act, 1961, the taxability of unlisted shares is determined depending on the period of holding i.e, whether the unlisted shares are held for long-term or short-term. This bifurcation on the basis of the period of holding is explained below:-

• If unlisted shares are held for more than 24 months i.e, 2 years then the capital gain arising on selling those shares is taxable as Long Term Capital Gains (LTCG).
• If unlisted shares are held for less than 24 months i.e, 2 years then in that case capital gain arising on such shares falls under the category of Short Term Capital Gain (STCG)

 Let’s discuss the most important question, 

What rate of tax is applicable on the selling of unlisted shares?

 The rate of tax applicable on selling of unlisted shares is given as below:-

Indexation is a benefit available to taxpayers which allows them to adjust their asset’s cost to give the effect of inflation over the years.

Another important question,

Well, the FMV (Fair Market Value) of unlisted shares needs to be determined by a Merchant Banker or Chartered Accountant after the valuation of the company.

 In case unlisted shares are transferred for the sale consideration lower than FMV (Fair Market value), then such FMV shall be deemed to be the full value of consideration for computing capital gains as per section 50CA of Income Tax Act, 1961. Simply put, the higher of the FMV or actual sale price of unlisted shares shall be taken into account while computing capital gains. 

One more important question taxpayers asked,

Is any exemption available on capital gains taxes arising on the selling of unlisted shares?

Well, the answer to this question is a partial yes. Exemption under section 54F is available to Individual or HUF assessee’ in case capital gain arises on the sale of any Long Term capital assets (not being a residential house property).

 So, exemption of Long Term Capital Gain (LTCG) arises on the sale of unlisted shares is covered under section 54F, but not Short Term Capital Gain (STCG). Also, this exemption is available only to Individuals or HUFs assessee’. Plus, there are certain conditions that need to be fulfilled by the Individual or HUF assessee in order to avail exemption under section 54F, which are:-

• The sale consideration is needed to be invested in the purchase or construction of a new residential house in India.
•  The new residential property must be purchased within one year before or two years after the date of transfer or the construction of the new residential house property must be completed within 3 years from the date of transfer.

• The sale consideration can also be deposited in a PSU bank as per Capital Gains Account Scheme, 1988 in order to avail the exemption, if the taxpayer is not able to invest in new residential property as mentioned above before the due date of the return or one 1year from the date of transfer, whichever is earlier.

• If a new asset is transferred within 3 years from the date of purchase or construction, whichever case may be, then exempt capital gain shall be taxable in the previous year in which transfer of new asset took place and shall be treated as Long Term Capital Gain (LTCG) only. Simply put, there is a lock-in period of 3 years.
• In case the entire sale consideration is not invested then exemption shall be allowed on a proportionate basis. 

Many times happened that unlisted shares are sold on loss, in that scenario

Will Set-off & Carry-Forward Provisions Shall be Available?

Yes, set-off and carry-forward provisions are applicable in the case of unlisted shares. If unlisted shares are sold at loss then the losses can be set off against similar capital gains nature only i.e, long-term capital losses can only be set off with Long Term Capital Gains (LTCG) and short term capital losses can only be set off with Short Term Capital gains (STCG). The unabsorbed loss on unlisted shares is allowed to carry forward for eight years.