Taxation of equity shares is easy – if the shares are sold after a year, any capital gains arising from such sale are taxed at 10% after crossing a threshold of Rs1 lakh. Shares sold in a year or less are taxed at a flat rate of 15%. But this taxation is applicable for listed shares. What if you hold shares in a company that is unlisted?
In this article, we will look at the taxation on unlisted shares.
Tax on Capital Gains of Unlisted Shares
The gains from unlisted shares will be taxable under the head ‘Income from capital gains’.
1. Long Term Capital Gain (LTCG): If an unlisted stock is sold after holding for more than 24 months, gains on such sales will be taxed at 20% after indexation. In case the shares are held by a non-resident Indian, the tax is 10% without indexation.
2. Short Term Capital Gain (STCG): If an unlisted stock is sold in 24 months or less, gain from such sale are taxed at the slab rate.
Long term capital loss can be set off against long-term capital gains only. Short-term capital loss can be set off against both short-term and long-term capital gains. Remaining loss can be carried forward for next 8 years.
An important caveat is that in case the shares are sold at a price lower than the fair market value (FMV) of such shares, then the FMV would be considered as the selling price (and not the actual sale price). The FMV needs to be calculated by a merchant banker or chartered accountant.
Tax on Capital Gains on Unlisted Shares That Are Sold after Getting Listed
Here, the tax rates will be the same as that on purchase-and-sale of listed shares. That is, the long-term gains (sold after holding for more than one year) will be taxed at 10% after a threshold of Rs1 lakh per financial year. Short-term gains, i.e., gains on selling shares in one year or less, will be taxed at 15%.
As you may have noticed, the LTCG on sale of an unlisted share enjoyed indexation benefit, but once the shares got listed, the indexation benefit was lost.
To tackle this, the government has allowed indexation of cost price for shares that were listed after 31 January 2018. However, the indexation will not be for the entire duration of holding but only up to the financial year 2017-18.
For example, an unlisted firm XYZ lists its shares in February 2018. You had purchased these shares in FY14-15 for Rs 100. You sold the share in FY21-22. For computing capital gains, you will index/inflate the cost price only up to FY17-18 and not till the financial year when the sale was made.
The indexed cost price will be reduced from sale price to arrive at LTCG.
Taxation of Gifted Unlisted Shares
The gift made by a relative will not attract any tax; however, the gains made from sale of such gifts will be taxed like any other asset. The taxation here remains the same for a person who sells his or her own shares. A point to note here is that, the cost price of the share for computing capital gains will be the cost paid by the original owner.
Taxation of Unlisted ESOPs
Employee Stock option plans (ESOPs) of an unlisted company are taxed in two instances.
At the time of exercise of option - The difference between the exercise price and fair market price (as calculated by merchant banker or CA) is considered as a ‘perquisite’ for tax purposes and added to income and taxed at slab rate.
At the time of sale of exercised shares – The difference between sale price and fair market value as on date of exercise is considered as capital gain or loss. The taxation is same as given above in taxation of capital gains of unlisted shares.