Income Tax on Unlisted Shares Investment & Regulations of Unlisted Stock Market
We will discuss all the aspects of Tax on Unlisted Shares Investment & also we will look into Regulations of Unlisted Stock Market in detail here.
When you are buying unlisted shares, you need to be aware of the certain regulations pertaining to these shares.
Though the stock exchanges or SEBI do not regulate these stocks there are certain rules related to the profit of these shares, taxation, exemptions, and others.
Income Tax Rules in Unlisted Shares Investment
Any profit you make from the unlisted shares is taxable as per the Income Tax Act of India. The proceeds from the sale of unlisted shares are included in the capital gains.
- It is considered as long-term capital gains when the investor sells the shares after holding them for more than twenty-four months or two years.
- If the investor sells the shares within 24 months of purchase, then it is considered a short-term capital gain.
In both cases, you need to pay the tax for the capital gain (profit). In the case of short-term capital gain from unlisted shares, the applicable tax rate is decided according to the slab.
For the long-term capital gain from unlisted shares, the rate is 20% at present.
Suppose, you had bought 100 unlisted shares of ABC ltd. in 2010 at Rs.200 per share, and at present, the price of those shares is Rs.900.
You sell all your 100 shares for Rs.900 to an intermediary.
Calculation of Tax on Unlisted Shares Investment
Profit from sale of unlisted shares = Sell Price – Cost price
= (900*100) – (200*100)
= 90000-20000 = Rs.70000
So your long-term capital gain tax would be = 20% * Rs.70000
However, you can reap the benefits of indexation if you had held the stocks for a longer duration.
There are another concept and rule in the taxation of unlisted shares.
Since, there is no actual market price present for unlisted shares, investors need to derive the fair market value (FMV).
Now, if you sell the unlisted shares and the Fair market value is less than the selling price of the shares, then the FMV will be considered as the sale price.
The IT department will levy the capital gain tax on the FMV of such shares.
Another thing to consider is that if the difference between the FMV and the actual selling price of the shares is above Rs.50000, then the buyer of the unlisted shares will deduct the tax under the ‘Income from other sources”.
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ITR Forms for Tax on Unlisted Shares
For filing the income generated unlisted shares, you need to fill the ITR 2 form. It is the ITR in which we file our capital gains incomes.
The due date for filing is 31st July if the tax audit is not applicable. Otherwise, it is 31st October for them who have to go through a tax audit.
Carry forward of Losses
If you had losses from unlisted shares, then you can set it off as well.
- If it is a short-term capital loss, then you can set it off against both long-term as well as short-term capital gains. You can carry forward the losses for a maximum of eight years.
- The long-term capital losses can only be set off against long-term capital gains. Similarly, the carry forward can be done up to eight-year.
Adjustments – Taxation on Unlisted Shares
If you are investing in unlisted shares, and you are a resident individual or HUF, then there is a provision for availing tax exemption against the basic limits for exemptions in the tax regime.
You need to adjust all the incomes from other sources against the basic exemption limit excluding the long-term capital gains and then if there is any remaining exemption limit, you can adjust the long-term capital gain.
Last but one of the most crucial facts about unlisted shares is that there is a lock-in period involved in unlisted shares investment.
If the unlisted shares that you purchase today, get listed in the stock exchange, then you cannot sell the shares within 1 year of the listing or IPO.
There is no lock-in period if the share is not listed though.
Regulation of Unlisted Stock Market by SEBI
Though SEBI does not interfere in this market of unlisted shares it has set some guidelines for calculating the value of the unlisted shares.
The guidelines help the general investors evaluate the real value of the unlisted shares easily. The guidelines are given below.
- You need to compute the diluted net worth of the shares (per share). Then, you must account for the outstanding options and warrants before computing the diluted net worth.
- You can extract the data from BSE and NSE and find out the P/E ratio of peer companies within the industry. 25% of those data can be used for calculating the P/E of the unlisted share you want to purchase.
- You then need to multiply the industry capitalization rate with the net worth of each share. This must be discounted at a 15% rate for illiquidity as well.
Income Tax in Unlisted Shares Investment – Conclusion
While investing in unlisted shares, you need to be aware of the regulations and taxation application on the unlisted shares.
Any income from unlisted shares is considered as capital gains and income from other sources. You need to make provisions for taxation when estimating your profit margins.
FAQs – Regulations and Taxations of Unlisted Shares
Here are few really important FAQs related to Taxation & Regulation of Unlistes Shares –
How can I file for income generated from unlisted shares?
You can visit the income tax department’s website and there you will find the ITR 2 form. Fill the form and submit with required details and documents.
Do I need to pay STT for unlisted shares?
No, you do not need to pay any STT/ securities transaction tax on unlisted shares.
What are long-term and short-term capital gains from unlisted shares?
If you hold the unlisted shares for less than 24 months and then sell to make a profit, it is known as a short-term capital gain. If the time duration is above 24 months, then it will be a long-term capital gain.
Does the tax rate change for unlisted shares profit?
Yes, the short-term capital gain tax rate is taken as per the slab and the long-term capital gain tax rate is 20% as of now. Both the rates change with time and other factors.
Is there an indexation benefit in unlisted shares?
Yes, if you hold the unlisted shares for the long-term, then you can avail of the indexation benefit.
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