Sold unlisted shares? Know the tax implications

As equity shares of a company are considered as capital assets, selling such shares would either result in a capital gain or capital loss.

Investing in unlisted shares may be lucrative, but is risky. It is lucrative because an investor may get the shares of a company at a lower price before it goes for an Initial Public Offering (IPO) to invite the general public to invest and list the shares on a stock exchange post the IPO.

It is risky because compared to a listed company – all the details of which are readily available on public domains – it is difficult to get the details of an unlisted company and ascertain the true value of its shares. Any misinformation may result in the loss of capital invested.

However, compared to a listed company, shares of an unlisted company face lower market risks due to lack of exposure in the capital market, although they face a higher default risk.

Lack of adequate liquidity may also create problems for the investors investing in unlisted shares and may result in getting a lower price at the time of selling such shares, especially during emergencies.

How gains on unlisted shares are taxed

As equity shares of a company are considered as capital assets, selling such shares would either result in a capital gain or capital loss.

Such gains or losses on sale of shares are further classified in short-term or long-term gains for taxation purposes.

Short-term gain/loss

If an unlisted share is sold within two years from the date of investing, gain or loss from it is considered as short term for calculation of tax.

While the short-term loss may be adjusted against the short-term or long-term gains, short-term gains are taxed as per the tax slab of the investor.

Long-term gain/loss

Any gain or loss from sale of an unlisted share is considered long term, if such a share is sold after two years from the date of investment.

The long-term loss may be adjusted against long-term gains, while long-term gains are taxed at a rate of 20 per cent after indexation.

“Any gains derived from unlisted shares would be required to be categorized as long term or short term based on their period such shares are held by the investor. Accordingly, if such unlisted shares are held for a period of more than 2 years, the same would be categorised as long term, otherwise short term,” said Dr. Suresh Surana, Founder, RSM India.

“The long term capital gains from unlisted shares are taxed at 20 per cent u/s 112 of the IT Act after claiming the benefit of indexation whereas the short term capital gains are applicable slab rate of the investor,” he added.

Which ITR Form to fill

While capital gains or losses can’t be disclosed in ITR-1 Form, even investing and holding an unlisted share disqualifies an assessee from filing ITR-1.

So, an investor holding an unlisted share has to file ITR-2, if the assessee doesn’t have any income from business or profession, otherwise ITR-3 has to be filed.