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A Comprehensive Guide to Unlisted Shares Taxation in India

Stock market investing offers the potential for long-term wealth creation and financial security. However, while the excitement of picking stocks, monitoring market trends, and watching your returns soar occupy your focus, the significant role of taxes often takes a backseat. Tax can considerably impact your investment returns and overall financial planning. Understanding how it affects your stocks is essential for maximising returns and avoiding any unwanted surprises. Let's find out everything there is to know about unlisted shares taxation in India.

What are unlisted shares?

Unlike publicly listed companies whose shares are available for trading on established stock markets, unlisted shares are not listed on recognised stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). Unlisted shares may be privately held by a limited number of investors in the company's pre-IPO (Initial Public Offering) stage.

Irrespective of how these shares are traded, their sale and purchase do qualify for capital gains tax.

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Capital gains tax on unlisted shares

Unlisted shares taxation in India is divided into two categories – long-term capital gains tax and short-term capital gains tax. These differ based on the holding period of the investment. Here's how this is done:

1. Long-Term Capital Gain Tax: If an investor sells an unlisted stock that has been held for more than 24 months or two years, any gain from the sale is categorised as a Long-Term Capital Gain (LTCG).

LTCG earned from unlisted stocks is taxed at 20% with indexation. Indexation refers to a benefit where the cost of an investment is adjusted according to the inflation rate. This helps in reducing the overall tax incurred.
 

2. Short-Term Capital Gain Tax: If an investor sells an unlisted stock that has been held for up to 24 months or two years, any gain from the sale is considered a Short-Term Capital Gain (STCG).  
STCG earned from unlisted stocks is taxed as per the investor's tax slab for the year. These profits are added to the total taxable income for the concerned year and taxed as per the prevailing income tax laws.

An important point to note about unlisted shares taxation is that there is no Securities Transaction Tax (STT) on these stocks.

Income tax filing for unlisted shares

Just like any other income, investors must report profits earned from holding unlisted shares of a company registered under the Companies Act 2013. LTCG and STCG should be disclosed under the 'Part A- General' information tab in the Income Tax Return (ITR) form. Depending on their income sources and filing requirements, tax filers can use ITR-2 or ITR-3 forms for file ITR on income earned from unlisted shares.

It is essential to comply with tax regulations and provide accurate information on unlisted shares while filing the ITR. A tax planner can help you understand the process in detail.

To sum it up

Unlisted shares can provide the potential for unique investment opportunities. However, they may also come with increased risks and challenges compared to investing in publicly listed securities. Therefore, it is important to be careful and research well before picking any stocks. It is also vital to know the tax on unlisted shares is charged to avoid any troubles later.

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