The bull run in the listed stock markets has also led to a bull run in the unlisted markets wherein investors buy and sell shares of private companies (like Reliance Retail, HDFC Securities), which are currently not listed on the NSE (National Stock Exchange) or on the BSE. The stock prices in the unlisted markets have also grown considerably in the past one year and investors are sitting on handsome gains. These shares are bought in the unlisted markets through brokers/direct sellers and also sold in the unlisted markets in a similar fashion. As these stocks are not sold on the listed stock exchange, no STT (securities transaction tax) is applicable and therefore the manner of applicability of taxes is also different from listed securities.
Rate of tax on sale of unlisted shares: The rate of tax on the gains made on the sale of these shares would depend on whether these shares are long term or short term in nature.
1. If the duration of holding is more than 24 months, the long-term capital gains (LTCG) tax rate is 20% (with indexation benefit)
2. If the duration of holding is less than 24 months, the short-term capital gains (STCG) tax is as per slab rates
In case of listed securities, shares held for more than 12 months are considered as long term and a flat 10% tax is levied. In case the listed security is held for less than 12 months, a flat 15% tax would be levied.
Manner of computation of capital gains: For the purpose of computation of capital gains, the fair market value of unquoted shares needs to be determined. Next, the higher of the actual sale price would be deemed to be the sale price for the purpose of payment of taxes. From the value computed above, the cost of acquisition as well as any expenditure on transfer would be subtracted. In case of long term capital gains, indexation would also be allowed and we will use the “indexed cost of acquisition" instead of the “actual cost of acquisition". LTCG exemption can also be claimed under Section 54F by investing the money in a residential house.
ITR filing: A person holding unlisted shares is required to disclose the same in his/her income tax return. ITR-1 and ITR-4 cannot be used in this case and only ITR-2 and ITR-3 can be used. If along with the gains on sale of shares, a person also has business income, then these gains would be required to be disclosed in ITR-3. In case the person does not have business income, then these gains would be disclosed in ITR-2.
In case of STCG, these would be required to be disclosed in Schedule CG at Point No. A5; in case of LTCG, it would be required to be disclosed in Schedule CG at Point No. B9.
It should be noted that even if the individual has not bought or sold any unlisted shares during the year but is simply holding unlisted shares that were bought in the previous years, he/she would be required to disclose these unlisted shares in the ITR as well.
Details regarding the opening balance of securities on the first day of the financial year, the shares purchased/sold as well as the closing balance of securities on the last day of the financial year would be required to be disclosed at Point (j) of Part A- General. This is one of the most common mistakes that people holding unlisted shares end up doing; they disclose this in the ITR only in the year of sale. It is important to note here that if a person held any unlisted share at any point during the year, it is required to be reported in the IT return even if there is no transaction.
Set off and carry forward: If the shares are sold at a loss, then the loss so arising cannot be set off against any other sources of income namely salary, house property, business income and other sources but can be set off against capital gains only.
Long-term capital loss arising on the sale of unlisted shares can be set off with LTCG only. However, short-term capital loss can be set off with both LTCG as well as STCG. If there is any loss left even after set-off, then the same can be carried forward for 8 years and set-off with capital gains that may arise in the next 8 years.