Tax implications on unlisted shares to both investors and the company

Investing in unlisted shares in India can have various tax implications, both at the time of acquisition and when selling or transferring these shares. Unlisted shares refer to shares of companies that are not listed on any recognized stock exchange.

Here are some key tax implications to consider

1. Capital Gains Tax

If you sell unlisted shares at a profit, you will be subject to capital gains tax. The tax treatment depends on the holding period of the shares:

2. Short-term Capital Gains (STCG)

If the shares are held for less than 24 months before selling, the gains will be treated as short-term capital gains. Short-term capital gains on unlisted shares are generally taxed at the individual's applicable income tax slab rates.

3. Long-term Capital Gains (LTCG)

If the shares are held for 24 months or more before selling, the gains will be treated as long-term capital gains. Long-term capital gains on unlisted shares are taxed at a special rate of 20% with indexation benefits. Indexation helps adjust the purchase price of the shares for inflation, reducing the overall tax liability.

4. Tax on Buyback of Shares

If the company whose unlisted shares you hold decides to buy back its shares, the gains made on the buyback will be taxed as capital gains. The tax treatment will be the same as mentioned above based on the holding period of the shares.

5. Gift Tax 

If you transfer unlisted shares as a gift to another person, any gains made on the transfer may attract gift tax. However, there is an exemption for gifts received from close relatives, such as spouses, parents, siblings, etc.

6. Dividend Income 

If the unlisted company declares dividends on its shares, the dividend income received by the investor will be taxable in their hands at the applicable tax rate. Additionally, the company may also be liable to pay Dividend Distribution Tax (DDT) before distributing dividends to shareholders.

7. Wealth Tax

Unlisted shares are considered assets, and until the assessment year 2015-16, India had a wealth tax on certain assets, including unlisted shares. However, from the assessment year 2016-17 onwards, the wealth tax has been abolished, so there is no wealth tax on unlisted shares.

8. Tax Deducted at Source (TDS)

If you sell unlisted shares and make a profit, there might be a requirement to deduct TDS at the applicable rates. The buyer may be required to deduct TDS at the time of purchase, and the seller should consider this while receiving the payment.

9. Tax Residency Certificate (TRC) 

For non-resident investors, to take advantage of Double Taxation Avoidance Agreements (DTAA) between India and their home country, they may need to obtain a Tax Residency Certificate from their home country's tax authorities.

It's important to note that tax laws and rates are subject to change, so it's always best to consult with a qualified tax advisor or chartered accountant to understand the specific tax implications based on your individual circumstances and the latest tax regulations.