Sold Unlisted Shares? Know the Tax Provisions

The stock market witnessed a bull run for over a year; this has also led to a bull run in the shares of the unlisted stocks. The investors of the unlisted shares also enjoyed handsome gains. 

Unlisted stocks are not listed on the recognised stock exchange, i.e. National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). These stocks are traded over-the-counter (OTC) market. These are the stock of companies that are usually at their pre-IPO stage and hence are an attractive investment opportunity for the investors for the long term. The purchase of unlisted shares can be made through brokers or direct sellers. 

As these stocks are not sold on the listed stock exchange, no STT (Securities Transactions Tax) is levied on these stocks. The tax implication of these shares is also different from other shares listed on the recognised stock exchange where STT is paid. 

The applicability of capital gain tax would depend on whether the unlisted stocks are long term or short term. If the unlisted stocks are held for less than 24 months, i.e. two years before selling, then the gains earned are taxable as short term capital gains. Short-term capital gains are taxable according to the investor’s income tax slab.

Similarly, long-term gains arise if the unlisted stocks are held for more than 24 months before selling. Long term gain tax is leviable at 20% with the benefit of Indexation. Indexation is the benefit allowed to increase the asset’s cost to give the effect of inflation. 

However, a holding period of 12 months is considered for listed securities. Listed securities held for more than 12 months are exempt up to Rs.1 lakh, and any long term gains exceeding Rs.1 lakh is taxable at 10%. Also, no indexation benefit is available on listed securities’ long-term gains. Short term gain of listed securities is taxable at a flat rate of 15%. 

In the case of unlisted shares, calculating the capital gain is different from the listed shares. In the case of listed securities, the cost and sale price is readily available as traded on the stock exchange. Whereas for unlisted shares, fair market value needs to be determined. The fair market value is compared with the actual sale price, and the higher of these two are considered as ‘sale consideration for these shares. The cost of transfer and purchase is subtracted from this value to arrive at the capital gains. Remember, if the holding of the transferred shares is more than 24 months, then their indexed acquisition cost needs to be computed instead of the actual acquisition cost.

An investor having gains or losses from unlisted shares must disclose the same in their income tax return. To report capital gains income, ITR-1 and ITR-4 cannot be used. In this case, only ITR-2 and ITR-3 can be filed. If a person has business income and gains on unlisted shares, ITR-3 must be filed. 

It is important to note that, unlike other listed securities, unlisted shares must be reported in ITR even if they are held and not sold in the financial year. 

Income Tax Act mandates reporting the opening balance of unlisted shares as on the first day of the financial year, the number of shares purchased/sold during the year, and their closing balance as on the last day of the financial year in Part A- General of the income tax return. 

Set-off and carry forward provisions of unlisted shares are similar to other capital gains losses. If these shares are sold at a loss, they cannot be set off against any other sources of income like salary, house property, income from business and other sources.

These losses can be set off against capital gains only. Long-term capital loss from the sale of unlisted shares can only be set off long-term capital gains. Short-term capital loss can be set off against long-term and short-term gains. The unabsorbed loss can be carried forward for eight years consecutive years. However, the carried forward loss can be set off with capital gains income of the relevant years. 

For any clarifications/feedback on the topic, please contact the writer at jyoti.arora@cleartax.in

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