Unlisted equity shares

Listed and unlisted shares are taxed by the same two questions. Is the gain long-term or short-term, and at what rate?

The answers differ, and they differ in ways that cost money.

Unlisted shares — the workbook also calls them unquoted shares — are shares not listed on any recognised stock exchange in India.

They are short-term if held for not more than 24 months before the transfer. Held longer, the gain is long-term.

A listed share crosses into long-term at 12 months. An unlisted one takes twice as long.

A long-term gain on unlisted shares is taxed at 12.50%, plus surcharge and health and education cess.

A short-term gain is taxed at the investor's normal rates. There is no concessional short-term rate here, and no annual exempt slice.

Dividend is the one place the two are alike. Dividend on unlisted shares is taxed exactly as dividend on listed shares.

There is also one route back. Sell unlisted shares through an IPO offer for sale and Section 112A applies after all.

Definition and holding period, section 11.3. Unlisted or unquoted shares are shares not listed on any recognised Stock Exchange in India. They are a short-term capital asset if held for not more than 24 months immediately preceding the date of transfer; held for more than 24 months, a long-term capital gain arises.

The three rates, sections 11.3.1 to 11.3.3.

The IPO exception. Where unlisted equity shares are offered for sale under an initial public offer, the gain arising is chargeable in accordance with Section 112A — the listed-share regime, with its Rs 1,25,000 exemption and its STT conditions.

Against the listed position, from Table 11.1 and section 11.2. This is where the marks are.

So the unlisted holder loses three things at once: twelve extra months, the Rs 1,25,000 exemption, and the 20% cap on short-term gains.

Preference shares run on the same split, section 11.4.2.

Grandfathering, for a share that used to be unlisted. Section 11.2.4 grandfathers acquisitions on or before 31-01-2018, and deals specifically with the awkward case. Where shares were not listed on a recognised stock exchange on 31-01-2018 but are listed on the date of transfer, the fair market value is taken as the cost of acquisition indexed by the cost inflation index of financial year 2017-18, divided by the cost inflation index of the year in which the shares were acquired, or FY 2001-02, whichever is later. The same treatment applies where shares listed on the date of transfer became the assessee's property in consideration of a share that was unlisted on 31-01-2018, by a transaction not regarded as transfer under Section 47.

Two benefits expressly denied, section 11.9.1. From the long-term capital gain taxable at 12.50%, no deduction is available under Sections 80C to 80U. Separately, the Section 87A rebate is not available against long-term capital gain covered under Section 112A — but note the wording, because it is stated for 112A, which is the listed route, not for 112.

One relief that does reach them, section 11.10. Total income of a resident individual or HUF is not chargeable up to the maximum exemption limit. Where total income, as reduced by long-term capital gains under Sections 112 and 112A or short-term gains under Section 111A, falls below that limit, the capital gains are reduced by the shortfall so that the exemption limit is fully used. The workbook's own example uses unlisted shares: total income excluding long-term capital gains of Rs 1,85,000, long-term capital gain from the sale of unlisted shares of Rs 2,50,000, and a maximum exemption limit of Rs 2,50,000 under the old tax regime. Total income falls short of the limit by Rs 65,000, so the capital gain is reduced by Rs 65,000 and tax is computed on Rs 1,85,000 (Rs 2,50,000 less Rs 65,000).

The workbook's Example 4 in section 11.3.3 asks exactly this question: take Example 3 and make the shares unlisted. Here is both halves.

Mr X, resident in India, holds shares of two companies:

ABC gain = 1,000 x (107 - 105) = Rs  2,000     holding 13+ months
XYZ gain = 1,000 x (135 - 120) = Rs 15,000     holding 10 months

If the shares are LISTED. The 12-month line splits them.

If the same shares are UNLISTED. The 24-month line catches both.

Rs 3,000 against Rs 5,100 on identical purchase dates, identical prices and identical gains. Listing status alone raised the tax by 70%. And nothing Mr X could have done in July 2024 would have changed it: ABC needed to be held to June 2025 to become long-term as an unlisted share.

Now hold an unlisted share long enough. Suppose Mr X instead sells 1,000 unlisted shares of PQR Ltd, bought at Rs 400 in April 2021 and sold at Rs 950 in April 2025 — 48 months.

Full value of consideration   1,000 x 950   = Rs 9,50,000
Less cost of acquisition      1,000 x 400   = Rs 4,00,000
                                              -----------
Long-term capital gain                        Rs 5,50,000
Tax at 12.50%                                 Rs   68,750  (plus surcharge and cess)

No Rs 1,25,000 exemption applies, and no deduction under Sections 80C to 80U may be set against the Rs 5,50,000. Had PQR been listed and STT paid, the first Rs 1,25,000 would have escaped and the tax would have been Rs 4,25,000 x 12.50% = Rs 53,125 — Rs 15,625 less on the same gain.

Chapter 11 (Taxation of Equity Products), section 11.3 Tax Treatment of Unlisted Equity Shares, is the core: the definition, the 24-month holding period, dividend treated as for listed shares, 12.50% on long-term gains, normal rates on short-term gains, the IPO offer-for-sale exception under Section 112A, and Example 4 which re-runs Example 3 on unlisted shares. Table 11.1 and sections 11.2.4 to 11.2.7 give the listed position the answer has to be measured against. Section 11.4.2 applies the same 12-versus-24-month split to preference shares. Section 11.9.1 denies Sections 80C to 80U against the 12.50% long-term gain, and section 11.10 works the exemption-limit adjustment on an unlisted-share gain of Rs 2,50,000.

Expect exactly Example 4 — a holding period that is long-term if listed and short-term if unlisted — and a question on the concessional benefits that do not travel to unlisted shares.

• 24 months for unlisted, 12 months for listed. This is the single most tested difference in the chapter, and the workbook's Example 4 exists to catch it.
• The Rs 1,25,000 exemption is a Section 112A benefit and does not apply to unlisted shares. Both routes tax long-term gains at 12.50%; only the listed route has an exempt slice.
• There is no 20% short-term rate for unlisted shares. Section 111A is written for listed shares with STT paid or an IFSC foreign-currency transaction. Unlisted short-term gains go at the assessee's normal rate, which for a 30% slab taxpayer is worse than 20%.
• Dividend is the same for both. Section 11.3.1 says the taxability of dividend from unlisted equity shares is the same as for listed equity shares — including the 20% cap on the interest deduction.
• An IPO offer for sale flips the regime. Gain on unlisted shares offered for sale under an IPO is chargeable under Section 112A, not under the unlisted rules.
• A share unlisted on 31-01-2018 but listed at transfer has its own grandfathering rule — the cost indexed by the FY 2017-18 cost inflation index divided by that of the year of acquisition or FY 2001-02, whichever is later. It is not the highest-quoted-price rule that applies to shares listed on 31-01-2018.
• Preference shares follow the same 12-versus-24-month split, with 12.50% long-term either way.
• The exemption-limit adjustment does reach unlisted gains. Section 11.10 applies to long-term gains under Sections 112 and 112A, and the workbook's own illustration is an unlisted-share gain.
• The Section 87A denial is worded for Section 112A. The workbook states that the rebate is not available against long-term capital gain covered under 112A, and does not extend that sentence to 112. Do not assume beyond what it says.