Unlisted shares, often associated with private companies and startups, pose unique challenges in terms of taxation. This article delves into the computation of capital gains, reporting requirements in Income Tax Returns (ITR), and various tax implications associated with unlisted shares.
1. Unlisted shares are the shares of the company that are not listed on stock exchanges and are traded over the counter. The unlisted shares include (a) Pre-IPO shares; (b) Delisted shares (c) ESOP shares. Mostly, these shares are held by private companies or startups. The foreign shares given under RSU/ESOP/ESPP schemes are also considered as ‘Unlisted Securities’.
2. Computation of Capital Gain: The fair market value of unlisted shares must be established to calculate capital gains. If a transfer occurs below the FMV, section 50CA of the Income Tax Act considers the FMV as the sales consideration. However, if the transfer happens at or above the FMV, the sales consideration is the original transfer value.
2.1 Fare Value of Unlisted Share: – Rule 11UA (2) of the Income Tax Act, 1961 deals with the valuation of unquoted shares in a company that is not listed on any recognized stock exchange. It states that the fair market value of unquoted shares and securities is to be determined based on the price that it would fetch if sold in the open market.
2.2Since there is no market price accessible for unlisted equities, determining their fair value can be challenging. Everything about unlisted shares is based on either book values or assumptions.
2.3 Cost of Acquisition The cost of acquisition in the case of unlisted shares will be the actual price that the investor has paid while purchasing the share. Further, the benefit of Indexation is also available for unlisted shares.
3. Let us try to understand the tax implication on the sale of Unlisted Shares and its reporting in Income Tax Returns, with the help of Illustrations.
4. Illustration 1: Mr. Naresh holds 1000 shares in XYZ Ltd, and the company is not listed on the Stock Exchange. He has sold 600 such shares in the financial year 2023-24. The relevant details for the calculation of Capital Gain Tax are as follows:
| Sl. | Date of Purchase | No. of share | Cost of acquisition | Sale consideration | Fair market value | Expenses incurred |
| (a) | 17.06.2022 | 200 | 30,000 | 24,000 | 28,000 | 1,000 |
| (b) | 28.10.2018 | 400 | 60,000 | 1,60,000 | 1,50,000 | 2,000 |
| CII in 2018-19 was 280 and in 2023-24 is 348. | ||||||
5. The Capital Gain on Unlisted Shares will be calculated as follows:
| Sl. | Particulars | LTCG (Rs.) | STCG (Rs.) |
| (a) | Sale consideration | 1,60,000 | 24,000 |
| (b) | Fair Market Value | 1,50,000 | 28,000 |
| (c) | Higher of the (a) or (b) | 1,60,000 | 28,000 |
| (d) | Cost of Acquisition (with indexation) | 74,571 | – |
| (e) | Cost of Acquisition (without indexation) | – | 30,000 |
| (f) | Expenditure incurred | 2,000 | 1,000 |
| (g) | LTCG/ STCG :[ c-(d+e+f)] | 83,429 | (3,000) |
6. Reporting of Capital Gain Tax in Income Tax Return (ITR): Capital Gain Tax on the sale of unlisted securities is required to be reported in ITR 2 or ITR 3, depending upon the taxpayer’s income. If a person has business income in addition to the gains on the sale of shares, then these gains/losses must be reported in ITR-3.
6.1 The Capital Gain from the sale of unlisted shares will be reported in the Table: From Sale of Assets other than all the above-listed items.
6.2 The Path is: Dashboard >Filing Returns for A.Y. 2024-25 > ITR 2> Schedules > Schedule Capital Gain > Capital Assets Sold > Sales of assets other than listed.
7. The extract of Short Term / Long Term Capital Gain or Loss in ITR 2 is as indicated below:-
7.1 Short-Term Capital Gain/ Loss:
| a(i) | In case assets sold include shares of a company other than quoted shares, enter the following details: – | |
| (a) | The full value of the consideration received/receivable in respect of unquoted shares | 24,000 |
| (b) | The fair market value of unquoted shares determined in the prescribed manner | 28,000 |
| (c) | Full value of consideration in respect of unquoted shares adopted as per section 50CA for the purpose of Capital Gains (higher than a or b) | 28,000 |
| a(ii) | Full value of consideration in respect of assets other than unquoted shares | 0 |
| a(iii) | Total [a(i)(c)+a(ii)] | 28,000 |
| b | Deductions under section 48 | |
| i | Cost of acquisition without indexation | 30,000 |
| ii | Cost of improvement without indexation | 0 |
| iii | . Expenditure wholly and exclusively in connection with the transfer | 1,000 |
| iv | Total (i+ii+iii) | 31,000 |
| c | Balance [a(iii)−b(iv)] | -3,000 |
| d. | In case of asset (security/unit) loss to be disallowed u/s 94(7) or 94(8) | 0 |
| e | Short Term Capital Gain on asset (c+d) | -3,000 |
7.2 Long-Term Capital Gain / Loss
| a(i) | In case assets sold include shares of a company other than quoted shares, enter the following details | |
| a. | The full value of the consideration received/receivable in respect of unquoted shares | 1,60,000 |
| b. | . The fair market value of unquoted shares determined in the prescribed manner | 1,50,000 |
| c | Full value of consideration in respect of unquoted shares adopted as per section 50CA for the purpose of Capital Gains (higher than a or b) | 1,60,000 |
| a(ii) | Full value of consideration in respect of assets other than unquoted shares | 0 |
| a(iii) | Total [a(i)(c)+a(ii)] | 1,60,000 |
| b. | Deductions under section 48 | |
| i. | Cost of acquisition with indexation | 74,571 |
| ii | Cost of improvement with indexation | 0 |
| iii | Expenditure wholly and exclusively in connection with the transfer | 2,000 |
| iv | Total (i+ii+iii) | 76,571 |
| c. | Balance [a(iii)−b(iv)] | 83,429 |
| d. | Deduction under sections 54F | 0 |
| e. | Long Term Capital Gain on asset (c−d) | 83,429 |
| Capital Gain Tax @ 20% | 16,686 | |
8. Capital Gain Tax: Unlisted shares are not listed on any recognized stock exchange and hence the companies will not be paying the STT i.e. Securities Transaction Tax. The Capital Gain Tax on the sale of unlisted shares is calculated based on the holding period of these shares.
7.1. If the holding period is more than 24 months, the tax rate is 20% with indexation benefits on Long Term Capital Gain.
7.2 If the holding is less than 24 months. The tax rate is as per the investor’s tax slab on Short Term Capital Gain.
8. Deduction under section 54F: Deduction under section 54F is available if sale proceeds from the sale of unlisted shares are invested in residential property within the prescribed period of 2 or 3 years.
9. Set Off & Carry Forward of Losses: – Long-term capital loss of listed shares can be offset with long-term capital gains of unlisted shares and vice versa.
9.1LTCL from listed shares will be set off against LTCG from listed shares. If any amount remains, then LTCL from unlisted shares will set off against LTCG from listed shares.
9.2 The unabsorbed loss can be carried forward for 8 years consecutive years. The carried forward loss can be set off with capital gains income of the relevant years.
10 Disclosure of Unlisted Equity Shares It is mandatory to disclose unlisted shares details in ITR, even if the person only holds unlisted shares that were purchased in prior years and hasn’t bought or sold any unlisted shares this year.
10.1 Illustration: Mr. Naresh exercised his ESOP option in 2022 and received a share certificate from an unlisted company. He needs to declare the unlisted shares in ITR while filing the ITR for the financial year 2023-24 irrespective of purchased during the year or not.
10.2Information about the opening balance of securities on the first day of the fiscal year, the shares bought and sold, and the closing balance of securities on the last day of the fiscal year must be declared in Part A – General Information
11. Other Relevant points to remember:
(a) Unlisted shares were listed at the time of Sale. In case the unlisted shares got listed at the time of the sale of shares, the tax rates will be identical to those applied to the purchase and sale of listed shares. Long-term gains (sold after more than a year) are subject to a 10% tax after the threshold of Rs 1 lakh.
(b)Gains on selling shares in less than a year will be taxed at a rate of 15% for short-term gains. The indexation benefit received on LTCG on the sale of an unlisted share is not applicable as the shares are now listed.
(c) Listed shares are de-listed in the Financial Year: In case, the listed shares got de-listed due to liquidation, buyback, or for any other reason, the capital gain/loss on transfer of such shares will be treated the same as unlisted shares.
Question 1 Mr. Naresh was holding shares of a listed company. In the financial year 2023-24, these shares are delisted from NSE/ BSE. His query is, whether the loss that occurred due to de-listing can be set off against gain from other Income.
Answer: Capital gain/losses arise only when there is a transfer of capital assets. If the capital asset is not transferred, there will not be any capital gain or loss. Hence, in his case, the losses cannot be set off against Capital Gains unless the capital loss is realized. Capital Losses can be booked at the time of buy-back or liquidation of a company when the actual transfer occurs.
Question 2: Mr. Naresh was holding shares in ABC Company and the said company was delisted from the stock exchange and went into liquidation in FY 2023-24. He received x amount instead of the shares held by him on the liquidation of a company. There will be any capital gain and if yes, how the capital gain amount will be arrived at?
Answer. The amount received by Mr. Naresh shall be chargeable to income tax under the head ‘Capital gains. The consideration price for capital gain purposes shall be money received and/or the market value of the other assets on the date of distribution minus the deemed dividend within the meaning of section 2(22)(c).
Any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution is attributable to the accumulated profits of the company immediately before its liquidation, whether capitalized or not, is deemed to be dividend income.
(c) Gifted Unlisted Share The gift of unlisted shares made by a relative will not attract any tax, however, the gains made from the sale of such gifts will be taxed like any other asset. The cost price of the share for computing capital gains will be the cost paid by the original owner. The taxation here remains the same for a person who sells his or her unquoted shares.
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