Taxation Implications on Unlisted Share Investments

Unlisted shares, acquired through brokers or directly from sellers in unlisted markets, are not subject to Securities Transaction Tax (STT) since they are not traded on listed stock exchanges. The taxation of these shares is determined based on the holding period, and the rules differ from those applicable to listed securities. If you do not comply with the guidelines, you may land up receiving the Income Tax Notice from the Department.

Capital Gains Tax on Unlisted Shares

1. Long-Term Capital Gains (LTCG)
   • Holding Period: More than 24 months.
   • Tax Rate: 12.5% without indexation benefits under the new regime (2024), compared to 20% with indexation benefits under the old regime.
   • Comparison with Listed Shares: For listed shares, LTCG is tax-exempt up to ₹1 lakh. Gains above ₹1 lakh are taxed at 12.5%.
2. Short-Term Capital Gains (STCG)
   • Holding Period: Less than 24 months.
   • Tax Rate: Taxed as per the individual’s income tax slab.
   • Comparison with Listed Shares: STCG for listed shares is taxed at a flat 20%.

Income Tax Filing for Unlisted Shares

Investors must report income from unlisted shares, including profits or losses, in their Income Tax Return (ITR). These shares are typically issued by companies registered under the Companies Act, 2013. Both Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) must be disclosed in the ITR under the 'Part A-General' section.

• ITR Forms:
  • ITR-2: Suitable for individuals without business income.
  • ITR-3: Applicable for individuals with business income, including gains from unlisted shares.

Tax Comparison on Unlisted Shares: Old vs. New Regime

Taxation of Shares Under the Income Tax Act

Important Points for Filing ITR

1. Disclosure of Share Balances:
   • Opening balance, purchases, sales, and closing balance of unlisted shares must be reported in Part A-General, Point (j).
2. Set-Off and Carry Forward of Losses:
   • Long-Term Losses: Can be adjusted only against LTCG.
   • Short-Term Losses: Can be adjusted against both LTCG and STCG.
   • Unadjusted Losses: Carried forward for up to 8 years for future set-offs.
3. Loss Adjustments: Losses from the sale of unlisted shares cannot be offset against income from other sources like salary, property, or business.

Tax Implications When Unlisted Shares Become Listed

• Upon listing, the tax treatment aligns with that of listed shares.
  • LTCG: Gains exceeding ₹1 lakh in a financial year are taxed at 12.5%.
  • STCG: Gains are taxed at 20%.

Taxation of Gifted Unlisted Shares

• Tax on Gift: Gifts received from relatives are exempt from tax.
• Tax on Sale of Gifted Shares: Gains are taxed as regular capital gains. The cost of acquisition is considered the original purchase price paid by the donor.

CONCLUSION

To pay taxes on unlisted shares, investors must be aware of specific rules related to capital gains, holding periods, and Income Tax Return (ITR) disclosures. For long-term investments, unlisted shares provide certain tax benefits. Short-Term Capital Gains (STCG) are taxed based on the individual's applicable income tax slab, while Long-Term Capital Gains (LTCG) are subject to a 20% tax rate without indexation benefits.

FREQUENTLY ASKED QUESTION

1. What is the holding period for Long-Term Capital Gains (LTCG) on unlisted shares?
   For unlisted shares, the holding period for LTCG is more than 24 months.
2. How are LTCG and STCG taxed for unlisted shares?
   • LTCG: Taxed at 12.5% without indexation under the new regime (2024) or 20% with indexation under the old regime.
   • STCG: Taxed as per the individual’s income tax slab.
3. Do I need to report unlisted shares in my Income Tax Return (ITR) even if no transactions occurred during the year?
   Yes, holding unlisted shares must be disclosed in the ITR, regardless of whether transactions occurred.
4. Which ITR form should be used for reporting unlisted shares?
   • ITR-2: For individuals without business income.
   • ITR-3: For individuals with business income.
5. Can losses from the sale of unlisted shares be carried forward or set off?
   • Long-term losses can only be adjusted against LTCG.
   • Short-term losses can be adjusted against both LTCG and STCG.
   • Unadjusted losses can be carried forward for up to 8 years.
6. What are the tax implications when unlisted shares become listed?
   Upon listing, the tax treatment aligns with listed shares:
   • LTCG exceeding ₹1 lakh in a financial year is taxed at 12.5%.
   • STCG is taxed at 20%.