This article will cover the topic of Capital Gains Tax for Unlisted Shares.
Unlisted shares have been in the portfolio of investors for many years now. Capital assets are without a doubt very beneficial investments.
To obtain the spread between the purchasing and selling prices, people continue to purchase and sell them.
Capital Gains is a word used in finance that describes this spread. These capital gains also come with tax rates that must be paid, just like any other gains. The gains come at a price.
The capital gains are divided into two segments, Long-Term Capital Gains (LTCG) and Short-Term Capital Gains. Both have different tax rates levied on them by the regulatory body.
Introduction to Capital Gains
The terms capital gains and capital losses are descriptions enough for most finance people. Since the gain produced is regarded as income, the Income Tax Act of 1961 will apply to tax it.
Additionally, the gain will be subject to tax in the same year that the asset transfer was completed. Its profits are divided into two categories, much as the capital asset:
- Long-Term Capital Gains
- Short-Term Capital Gains
However, it might not be wise to directly explore the grounds of capital gains and taxation. To completely understand the concept it is best to start from the basics such as understanding unlisted shares.
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What are Unlisted Shares?
The most important factor that differentiates unlisted shares from unlisted shares is that they are not traded or listed in any stock exchanges in India.
Then how is it traded? Since it is not listed in any exchanges, interested investors can take the buy and sell position over the counter or in grey markets. The execution is usually done through brokers or directly between the buyer and seller.
Now, in terms of capital gains from unlisted shares, there are two separate types of these gains-Long-Term Capital Gains and Short-Term Capital Gains.
Long-Term Capital Gains
For any unlisted share held for more than 24 months, the capital gain or loss generated from value appreciation or depreciation of the asset is known to be Long-Term Capital Gain (LTCG) or Long-Term Capital Loss (LTCL).
Short-Term Capital Gains
For any unlisted share held for less than or nearly 24 months, the capital gain or loss generated from value appreciation or depreciation of the asset is known to be Short-Term Capital Gain (STCG) or Short-Term Capital Loss (STCL).
How to calculate Capital Gains on Unlisted Shares?
The capital gain calculation for unlisted shares is slightly different from the listed shares. For listed shares, it is quite easy because the prices are readily available on the stock exchanges but so is not the case for unlisted shares.
To calculate the true value of the unlisted shares, the investor will need to determine their fair market value. Then this fair value gets compared against the actual market value and it is determined whether the stock is undervalued or overvalued.
To reach the “sale consideration” of the unlisted shares, the investor will have to evaluate and determine the highest rate between the actual value of the asset and the fair market value.
Now this sale consideration and the initial purchase costs (incl. the cost of transfer) should be subtracted to reach the capital gain or loss.
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Income tax levied on Unlisted Shares
An investor is obligated to report the opening balance of their unlisted shares at beginning of the financial year, under Income Tax Act.
In general, the capital gains need to be filed under only ITR-2 and ITR-3. But for unlisted share gains and other types of business income, needs to be filed under ITR-3.
Below is a brief on the tax schemes for unlisted shares:
Long-term Capital gains (For residents): Taxable at 20% after indexation.
Long-term Capital gains (For residents): Taxable at 10% without indexation.
Short-term Capital gains: Taxed at slab rates.
Taxation under different scenarios
The taxation is calculated based on fair market value. This is calculated by a merchant banker or chartered accountant. Between the actual sale price and the fair market value, whichever is highest will be considered the sale price.
Taxation of capital gains earned from selling shares after they get listed:
In this type of scenario, the unlisted shares will be treated the same way as the listed shares.
The short-term gains get taxed at 15%. As for the long-term gains which have crossed the threshold of Rs.1 Lakh gets taxed at %.
Taxation on Unlisted ESOPs: The ESOPs of an unlisted company gets taxed in two ways-
- During the exercise of the option: The spread between the fair market price and the exercise price, called “prerequisite”, gets included in the income of the investors and then is subject to taxation based on slab rates.
- During the sale of exercised shares: Based on the difference between the sale price and the FMV, the loss or gain is calculated. The taxation will be similar to the terms mentioned above for unlisted shares.
Taxation of Gifted Unlisted Shares
Many might gift the unlisted shares they own to other individuals.
In such cases, if the new owner earns any gain from these gifted unlisted shares, they will be taxed on the gain or loss calculated by subtracting the original cost price from the sale considerations.
The taxation will be similar to the usual terms of the unlisted share gains.
Set off of Capital Gains
The owners of unlisted shares can set off their losses in the following two ways:
Set off capital losses against similar capital gains
When trying to set off any capital loss from unlisted shares in the books, investors can only do so with the capital gain earned from unlisted shares.
Long-term capital losses are set off by Long term capital gains and short-term capital losses are set off by short-term capital gains.
And for the losses which could not be set off, they will be carried forward for the consecutive next eight years based on the losses that couldn’t be set off in the relevant years.
Set off and carry forward provision of unlisted shares
The unlisted shares incur losses, then the owner must keep in mind that it cannot be set off by any other income source like salary, income from a business, house property, etc.
It is anticipated that the tax authorities would look toward simplifying and unifying the capital gains tax structure in light of the upcoming Budget of 2023.
According to rumors circulating in the community, the Budget 2023 will likely be taxpayer-friendly given that the world economies are on the verge of recession.
The rationalization of capital gains tax rates, as well as the streamlining of the computation process, might stimulate investment and growth in the country.
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