1. Unlisted Shares: A Different Set of Rules
Capital gains on unlisted shares (shares of private companies not listed on any recognised stock exchange) follow different rules than listed equity. The holding period for LTCG is 24 months (not 12 months), the tax rate is different (20% or 12.5% depending on date of acquisition), and there is no STT -- meaning the concessional Section 112A rate does not apply. With the exponential growth of startup investments, ESOPs, and private equity in India, understanding unlisted share capital gains has become essential for a much wider range of taxpayers.
2. Holding Period: 24 Months for LTCG
For unlisted equity shares, the holding period threshold for Long-Term Capital Gains is 24 months (2 years):
- Held more than 24 months: LTCG
- Held 24 months or less: STCG
- This contrasts with listed equity: 12 months for LTCG
3. Tax Rates on Unlisted Shares
| Category | Tax Rate | Indexation? |
|---|---|---|
| LTCG on unlisted shares acquired before 23 July 2024 (grandfathering option) | 20% with CII indexation OR 12.5% without -- choose lower | Yes (if 20% chosen) |
| LTCG on unlisted shares acquired on or after 23 July 2024 | 12.5% without indexation | No |
| STCG (held 24 months or less) | Slab rate | Not applicable |
4. Cost of Acquisition for Unlisted Shares
The cost depends on how the shares were acquired:
- Purchase: actual price paid
- Subscription (at face value or premium): amount paid at subscription
- ESOP: FMV on allotment date (the amount already taxed as perquisite under Section 17(2))
- Gift from relative: original cost to the donor (recipient inherits the cost)
- Inheritance: original cost to the deceased (heir inherits cost and combined holding period)
- Rights issue: rights issue price
- Bonus shares: Rs 0 cost (bonus shares are issued free)
5. Bonus Shares from Unlisted Companies
Bonus shares from unlisted companies:
- Cost: Rs 0 (issued free)
- Holding period: starts from date of allotment of bonus shares (not from the original shares)
- Capital gains on sale: entire sale price is capital gain (since cost is zero)
- LTCG if held 24+ months from bonus allotment date: 12.5% (or grandfathering option)
6. Section 56(2)(x): Buyer Implications
If unlisted shares are acquired at less than Fair Market Value (FMV), the difference (FMV minus consideration paid) is taxable as income from other sources for the buyer under Section 56(2)(x). Threshold: 10% -- if the purchase price is at least 90% of FMV, no deemed income. This prevents artificially low-price transactions for tax planning purposes. FMV for unlisted shares is determined by a SEBI-registered merchant banker.
7. Startup ESOP Unlisted Shares: Special Considerations
For startup employees who received ESOPs and are now selling their unlisted shares:
- Cost of acquisition: FMV at allotment date (taxed as perquisite -- the startup deferral may have deferred this)
- Holding period: from allotment date
- Tax at sale: LTCG at 12.5%/20% (if 24+ months held) or STCG at slab rate
- If startup deferral was used: at the point of deferral end, perquisite tax becomes due -- TDS deducted by employer; then capital gains tax at subsequent sale is on appreciation beyond FMV at allotment
8. FMV for Unlisted Shares
Fair Market Value of unlisted shares is determined by a SEBI-registered merchant banker using the Discounted Cash Flow (DCF) method or Net Asset Value (NAV) method. This FMV is used for:
- Section 56(2)(viib) (angel tax -- abolished): no longer needed for share issuances
- Section 56(2)(x): determining if a purchase was at less than FMV (buyer deemed income)
- ESOP perquisite computation: FMV at allotment date
- Gift of unlisted shares: FMV for determining gift value for the recipient
9. Reporting Unlisted Shares in ITR
Capital gains from unlisted share sales are reported in Schedule CG of ITR-2 or ITR-3 under "B2 Short-term capital gains on sale of assets other than above" (STCG) or "C4 Long-term capital gains on sale of unlisted equity shares" (LTCG). Provide: scrip name, ISIN (if available), date of acquisition, cost, date of sale, and consideration. For ESOP unlisted shares: attach FMV certificate from merchant banker if required by AO.
10. Why TaxClue
Unlisted share transactions -- ESOP, startup equity, private equity -- involve complex FMV, perquisite, and capital gains calculations. TaxClue advises on unlisted share capital gains and ensures correct ITR reporting. Contact us under ITA 2025.