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Key takeaways
- Unlisted shares are shares in companies not listed on a recognised stock exchange.
- A capital gain is long-term if shares were held for more than 24 months. Gains on shares held for 24 months or less are taxed as short-term capital gains at the seller's slab rate.
- Long-term capital gains on unlisted shares are taxed at 12.5% flat, without indexation, for transfers made on or after 23 July 2024. Budget 2024 reduced the tax rate from 20% and removed the indexation benefit.
- Section 112A, which provides a ₹1.25 lakh annual LTCG exemption, applies only to listed equity subject to STT. It does not apply to unlisted shares.
- The cost of acquisition of shares varies by how shares were acquired: purchase price for bought shares, FMV at exercise for ESOP shares (under Section 49(2AA)), donor's cost for gifted shares (under Section 49(1)), and nil for bonus shares (under Section 55(2)(aa)).
- Report unlisted share gains in Schedule CG under Section 112 in ITR-2 or ITR-3.
When you sell shares in an unlisted company, the gain is taxed as a capital gain under the Income Tax Act, 1961. The tax rate depends on how long you held the shares.
What counts as an unlisted share
An unlisted share is a share in a company whose equity is not listed and actively traded on a recognised stock exchange such as the BSE or NSE.
Once a company lists, the shares it has already issued become listed securities and the tax rules for listed equity apply from that point onward.
Capital gains on unlisted shares based on holding period
For unlisted shares, a gain qualifies as long-term if the shares were held for more than 24 months before the date of sale. Gains on shares held for 24 months or less are treated as short-term capital gains.
The holding period of the capital asset is counted from the date of purchase or acquisition to the date immediately before the date of its transfer.
- For shares purchased directly, the acquisition date is the date of allotment recorded in the company's register of members.
- For shares acquired through ESOP exercise, the holding period starts from the date of exercise, not from the date the options were granted.
The 24-month threshold for unlisted shares is longer than the 12-month threshold that applies to listed shares.
Tax on capital gains (after Budget 2024)
The Finance (No. 2) Act, 2024, revised the capital gains rates for unlisted shares. These rates apply to transfers made on or after 23 July 2024.
Short-term capital gains (STCG)
STCG on unlisted shares is taxed at the seller's applicable income tax slab rate. There is no flat rate for short-term gains on unlisted equity. The gain is added to the seller's total income for the year and taxed at the slab rates applicable to that combined income.
For illustrative purposes, assuming the seller falls within the highest 30% tax slab, the short-term capital gain would be taxable at 30%, plus applicable surcharge and health and education cess.
Long-term capital gains (LTCG)
LTCG on unlisted shares is taxed at a flat rate of 12.5%, without the benefit of indexation, plus applicable surcharge and cess. Budget 2024 reduced the LTCG rate from 20% (which had included an indexation benefit) to 12.5% without indexation.
Under the previous regime, indexation allowed sellers to inflate the original purchase price using the government's Cost Inflation Index (CII), reducing the taxable gain in high-inflation environments. That adjustment is no longer available for transfers made after 23 July 2024.
These rates are subject to surcharge and health and education cess. Verify against the Finance Act applicable to the relevant financial year.
Note: Section 112A of the Income Tax Act (tax on long-term capital gains) applies only to equity shares that are listed on a recognised stock exchange and were subject to Securities Transaction Tax (STT) on the transfer. It is this provision that provides the ₹1.25 lakh annual LTCG exemption. Unlisted shares are not subject to STT. They are governed by Section 112, not Section 112A and the ₹1.25 lakh exemption does not apply. The entire LTCG on unlisted shares is taxable at 12.5%.
Cost of acquisition: how it varies by acquisition route
The cost of acquisition is what the law treats as your purchase price for the purpose of computing the capital gain. It is not always the same as what you paid out of pocket, and the correct figure depends on how you acquired the shares.
Shares purchased in a primary or secondary transaction
The cost of acquisition is the price you actually paid, including any fees directly attributable to the acquisition such as legal fees or stamp duty on the share transfer deed.
Shares acquired through ESOP exercise
The cost of acquisition is the Fair Market Value (FMV) of the shares on the date of exercise, not the exercise price. The reason: the difference between the exercise price and the FMV at exercise was already taxed as perquisite income (salary) in the year of exercise.
Using FMV as the cost base ensures the same amount is not taxed again as a capital gain. This treatment is provided under Section 49(2AA) of the Income Tax Act. For unlisted companies, this FMV must have been determined by a SEBI-registered Category I Merchant Banker at the time of exercise.
Shares received as a gift from a relative
Where shares are received as a gift from a specified relative, the gift is not taxable in the recipient's hands under Section 56(2)(x) of the Income Tax Act. When the recipient later sells those shares, the cost of acquisition is deemed to be the donor's original cost under Section 49(1), and the donor's holding period is included when determining whether the gain is short-term or long-term.
Inherited shares
The cost of acquisition is the original cost at which the previous owner acquired the shares, as provided under Section 49(1) of the Income Tax Act. The holding period of the previous owner is included when determining long-term or short-term classification for the inheritor.
Bonus shares issued by an unlisted company
The cost of acquisition of bonus shares is nil under Section 55(2)(aa) of the Income Tax Act. A sale of bonus shares therefore produces a capital gain equal to the full sale consideration, with no deduction for cost.
How to calculate your capital gain
Capital gain = Full value of consideration − (Cost of acquisition + Expenditure incurred on the transfer)
The full value of consideration is the total sale price received or receivable, for a straightforward share sale, this equals the amount paid by the buyer. Transfer expenses, such as brokerage or commission, stamp duty, legal expenses, etc., are deductible.
Example
You purchased 5,000 shares directly from an existing shareholder in an unlisted company for ₹80 per share in March 2021. You sold all shares in November 2024 for ₹220 per share and paid an intermediary fee of ₹15,000 to the person who facilitated the transaction.
Holding period: March 2021 to November 2024 = approximately 44 months. This exceeds 24 months, so the gain is long-term.
- Full value of consideration: 5,000 × ₹220 = ₹11,00,000
- Cost of acquisition: 5,000 × ₹80 = ₹4,00,000
- Transfer expenses: ₹15,000
- Long-term capital gain: ₹11,00,000 − ₹4,00,000 − ₹15,000 = ₹6,85,000
- Tax at 12.5% (before surcharge and cess): ₹6,85,000 × 12.5% = ₹85,625
No indexation adjustment is applied to the ₹4,00,000 cost for transfers made after 23 July 2024.
Surcharge and cess
The 12.5% LTCG rate is a base rate. The actual amount payable includes surcharge, calculated according to the seller's total income bracket, and health and education cess at 4%. For STCG, which is taxed at the slab rate, the surcharge follows the standard slab-based schedule. Entities selling the shares with high total income should verify the applicable surcharge rate with a tax adviser for the relevant assessment year.
Treatment of capital losses: set-off and carry-forward
If you sell unlisted shares at a loss, the tax treatment depends on whether the loss is short-term or long-term.
A short-term capital loss can be set off against both short-term and long-term capital gains in the same financial year. A long-term capital loss can be set off only against long-term capital gains.
An unabsorbed short-term capital loss or long-term capital loss can be carried forward for up to eight assessment years. In both cases, the carry-forward is available only if the return is filed before the due date.
Tax treatment for non-resident sellers
Non-resident Indians (NRIs) and other non-residents face a different tax framework. Under the first proviso to Section 112 of Income Tax Act, non-residents selling unlisted shares in India are taxed at 12.5% for share transfers made on or after 23 July 2024.
The buyer of shares is responsible for deducting tax at source under Section 195 before remitting sale proceeds to a non-resident seller.
Non-resident sellers may also be eligible for relief under a Double Taxation Avoidance Agreement (DTAA) between India and their country of residence, which can reduce or eliminate the Indian tax liability depending on the treaty terms. They should obtain advice specific to their tax residency position before completing a transaction.
How to report capital gains in your ITR
Capital gains from unlisted shares are reported in Schedule CG of your income tax return. ITR-1 (Sahaj) cannot accommodate capital gains from unlisted equity. You will need ITR-2 (for individuals and HUFs with capital gains but no business income) or ITR-3 (if you also have business income).
If you sold ESOP shares, your cost of acquisition is the FMV on the date of exercise. Confirm that the FMV figure used matches what your employer reported and what the merchant banker certified at the time. Any inconsistency can create a mismatch between your ITR and the employer's Form 26AS or Annual Information Statement (AIS).
FAQs on capital gains on unlisted shares
Are ESOP shares taxed as capital gains in India?
When ESOP shares are sold, any gain over the Fair Market Value on the date of exercise is taxed as a capital gain. The holding period is counted from the exercise date. For unlisted company shares held for more than 24 months after exercise, the gain is taxed as LTCG at 12.5%. For shares held 24 months or less, STCG is taxed at the slab rate. The perquisite tax already paid at exercise is not taxed again because the FMV at exercise becomes the cost of acquisition under Section 49(2AA).
Does the ₹1.25 lakh LTCG exemption apply to unlisted shares?
No. The ₹1.25 lakh annual exemption for long-term capital gains is provided under Section 112A of the Income Tax Act, which applies only to listed equity shares subject to Securities Transaction Tax (STT). Unlisted shares are not subject to STT and are governed by Section 112. The entire LTCG on unlisted shares is taxable at 12.5% with no threshold exemption.
Is indexation available on long-term capital gains from unlisted shares?
Indexation is no longer available for unlisted shares transferred or sold on or after 23 July 2024. Under the previous regime, sellers could use the Cost Inflation Index (CII) to inflate the original purchase price, reducing the taxable gain. The Finance (No. 2) Act, 2024 removed this benefit and reduced the LTCG rate from 20% to 12.5%.
