What are Unlisted Stocks?
Unlisted stocks are the stocks of companies that are not listed on formal/public stock exchanges like NSE or BSE for trading. These companies are generally subsidiaries of well-known Listed companies or new-age businesses that yet to go for listing on NSE/BSE. A few names are LIC, Paytm, Ola, Pharm Easy, Bira Beer OYO rooms, etc.
In simple words, unlisted equity shares or stocks are securities that do not trade on public stock exchanges. Investors buy/sell unlisted shares in India on the over-the-counter (OTC) market, with the help of market makers/dealers. Tax calculations differ for unlisted equity shares than listed shares.
Tax Calculations on Listed Stocks
- In the case of unlisted shares, if the stock is sold within 2 years from its acquisition date, the gain or loss will be considered as a short-term capital gains.
- On the other hand, the gain or loss is long-term if the stocks are sold after 24 months purchasing date.
Tax rates on capital gains
- Short Term Capital Gain (STCG)
Short-term capital gains are taxable as per the tax slab of the investor. Suppose the investors tax slab is 10% – then the investors capital gains will be taxed at 10%. If the investors tax slab is 30% then the investors capital gains will be taxed at 30%
- Long Term Capital Gain (LTCG)
On the other hand, if the stocks are sold after 24 months of purchasing, it is considered long-term, and capital gains are taxed as long-term capital gains @ 20% with indexation in case of a resident taxpayer and @ 10% without indexation in case of a non-resident person.
Grandfathering in case of unlisted shares which are sold after listing on a recognised stock exchange –
In case of listed shares purchased before 31/01/2018, the grandfathering benefit is available. Accordingly, higher of the actual cost of acquisition of the unlisted share or highest quoted price of the said share on 31/01/2018 can be considered as the cost price and long term capital gain is computed accordingly.
In case of unlisted shares which are listed after January 2018 and sold after six months (earlier one year) of the listing on the stock exchange, the cost of acquisition can be indexed up to the financial year 2017-18 to arrive at the grandfathered cost. Such grandfathered cost is reduced from the sale price of the shares on the exchange to arrive at the long term capital gains which are taxed @ 10%.
Set-off and Carried Forward of Loss from Unlisted Equity Shares
- Long Term Capital Loss (LTCL)
Investors can set off long term capital loss only from an income considered on long-term Capital Gain. No other income can set off against the long term capital losses.
- Short Term Capital Loss (STCL)
Investors can set off the short-term capital loss only against short-term capital gain income from the unlisted equity shares. No other income can be set off against short term capital losses.
If there is no other long-term capital gain in the current year, investors are allowed to carry forward both long term and short term up to the next 8 years.
It must be noted that if the Income tax return is not filed within the statutory due date, the losses pertaining to that year cannot be set off against future incomes.
NOTE: Once the unlisted company issues its IPO and gets listed on a formal stock exchange, the investor can not sell his/her unlisted or pre-IPO shares before six months from the listing date. It means after listing, you can trade these stocks on the stock exchange only, and the gain will be taxed as long-term capital gains from listed security @10%.
In this case, the indexation benefit will be lost. For example, an unlisted company, ABC Ltd, listed its shares in March 2018. You invested in the company in FY14-15 and sold those shares in FY 20-21. You can inflate the cost price only up to FY17-18 while calculating taxes. You cannot benefit from cost indexation until the date of sale.
Taxes on Listed Stocks vs. Unlisted Stocks
|Listed Stocks Taxation||Unlisted Stocks Taxation|
|Equities sold within a year – 15%||Equities sold within 2 years – applicable slab rate|
|Equities sold after a year and profits over 1 lakh – 10%||Equities sold after 2 years – 20% after indexation in case of residents and 10% without indexation in case of nonresidents.|
Concept of Fair Market Value and Section 50CA
In the case of unlisted stocks, the company’s merchant banker fixes the FMV of its shares.
- If the investor transfers/sells stocks below this value, then FMV is the sale consideration to calculate the capital gains u/s 50CA of the Income Tax Act. There will be no matter of the actual selling price here.
- If the selling price is equal to or higher than FMV, then this selling price is the sale consideration. Section 50CA will not be applicable in this case.
Let’s say Z invested a total of Rs. 50,000 in unlisted 500 shares @Rs. 100 per share of ABC ltd in October 2018 and sold the same in July 2020 @ Rs. 140 per share for Rs. 70,000. The holding period is less than 24 months. Hence, gains will be treated as short-term and taxed as per his applicable tax slab rate.
Assuming brokerage rate is 0.5%. Short-term capital gains will be full sales consideration – (Purchase price + Brokerage).
Therefore, short-term capital gain made by Sandeep will be: Rs. 70,000 – (Rs. 50,000+ Rs. 350) = Rs. 19,650
The tax rate applicable to these short-term capital gains is the same as the assessor’s applicable tax rate in an assessment year.
Let’s say all aspects are the same in the above example. Only the acquisition date changes to October 2017 and the selling date to March 2020 @ Rs. 140 per share for Rs. 70,000. Capital gains will be taxed as long-term capital gains. Therefore, there is a need to check the Indexed purchase price of shares and then calculate the long-term capital gains. The tax rate will be 20%.
Indexed purchase price of the shares:
= Cost of acquisition x CII of the year of sale / CII of the year of purchase
= 50000 x 289 / 272 = 53,125 approximately
So, the long-term capital gains will be:
= Rs. 70,000 – (Rs. 53,125 + Rs. 350) = Rs. 16,525.
The tax rate will be 20% on this amount.
This is what an investor should know about unlisted shares taxation. Investors take advantage of these stocks with the help of an investment advisor. Indians prefer investing in unlisted companies that could go for an IPO (initial public offering) in the near future, hoping for significant returns.
The team of RURASH – a leading FinTech venture with thorough knowledge, can help investors, seeking guidance for making correct investment decisions.
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