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Content Overview [ Contact us ](#contact-us-sidebar) #### Content Overview #### Get your unlisted share sale tax-structured before closing [Let's Talk](https://calendly.com/consulttreelife/20min?utm_source=blogbannertreelife) #### Get in touch with us Your information is confidential and secure Or [Book a CONSULTATION](https://calendly.com/consulttreelife) Δ Blog Content Overview - [0.1 What is the capital gains tax rate on unlisted shares in India?](#What_is_the_capital_gains_tax_rate_on_unlisted_shares_in_India) - [1 Holding period: 24 months is the threshold for unlisted shares](#Holding_period_24_months_is_the_threshold_for_unlisted_shares) - [2 Tax rates on unlisted shares for FY 2026-27 (AY 2027-28)](#Tax_rates_on_unlisted_shares_for_FY_2026-27_AY_2027-28) - [3 How cost of acquisition is determined](#How_cost_of_acquisition_is_determined) - [4 Section 50CA: the FMV floor on the seller’s side](#Section_50CA_the_FMV_floor_on_the_seller8217s_side) - [5 Section 56(2)(x): the buyer’s exposure on below-FMV acquisitions](#Section_562x_the_buyer8217s_exposure_on_below-FMV_acquisitions) - [6 ESOP taxation: the cost-of-acquisition trap on secondary sale](#ESOP_taxation_the_cost-of-acquisition_trap_on_secondary_sale) - [7 What exemptions are available to reduce tax?](#What_exemptions_are_available_to_reduce_tax) - [8 NRI taxation, TDS under Section 195, and FEMA repatriation](#NRI_taxation_TDS_under_Section_195_and_FEMA_repatriation) - [9 ITR reporting: which form and which schedule](#ITR_reporting_which_form_and_which_schedule) - [10 Common mistakes that generate assessments and penalties](#Common_mistakes_that_generate_assessments_and_penalties) - [11 Treelife practitioner note](#Treelife_practitioner_note) - [12 Frequently asked questions](#Frequently_asked_questions) Selling shares in a private company sits at the intersection of capital gains law, valuation rules, and, for certain sellers, FEMA. The Finance (No. 2) Act, 2024 made the most significant change to this area in over a decade: the rate on long-term gains from unlisted shares dropped from 20% with indexation to 12.5% without indexation, effective 23 July 2024. That rate carries forward into FY 2026-27 (AY 2027-28) with no further amendments from Budget 2025 or Budget 2026. What the rate change did not simplify is the surrounding compliance architecture: the FMV floor rule under Section 50CA, the buyer-side exposure under Section 56(2)(x), the cost-of-acquisition trap specific to ESOP secondary sales, and the TDS and repatriation chain when a seller is an NRI. This article covers each of those in sequence so you enter a secondary transaction with complete visibility on the tax position. ### **What is the capital gains tax rate on unlisted shares in India?** Long-term capital gains (LTCG) on unlisted shares held for more than 24 months are taxed at 12.5% without indexation under Section 112 of the Income Tax Act, 1961, effective for transfers on or after 23 July 2024. Short-term capital gains (STCG) on shares held for 24 months or less are added to total income and taxed at the applicable slab rate. There is no annual exemption threshold for unlisted share LTCG. Every rupee of gain is taxable. ## Holding period: 24 months is the threshold for unlisted shares The holding period test for unlisted shares is different from the 12-month rule that applies to listed equity. A share in a company not listed on a recognised stock exchange in India (BSE, NSE, or any other recognised exchange) qualifies as a long-term capital asset only after 24 months of continuous holding. The holding period starts on the date of acquisition or allotment and ends on the date of transfer. For shares received as a gift, the holding period of the original owner is counted by virtue of Section 49(1). For ESOP shares, the holding period starts from the date of allotment after exercise, not from the date of grant or vesting. One scenario that catches sellers off guard: shares in a company that subsequently lists on an exchange. If the company was unlisted at the time of acquisition and later lists, the holding period rule that determines LTCG classification is the one applicable at the time of transfer. So if the company lists and you sell post-listing, the 12-month rule for listed shares applies from the date of listing, not from your original acquisition date. CBDT circular No. 225/12/2016/ITA.II dated 02 May 2016 confirms that income from transfer of unlisted shares is taxed as capital gains regardless of the mode of holding or volume of transactions, removing any dispute about whether a high-frequency seller could be treated as running a business. ## Tax rates on unlisted shares for FY 2026-27 (AY 2027-28) **Long-term capital gains (holding period above 24 months)** LTCG on unlisted shares is taxed at 12.5% under Section 112 of the Income Tax Act, 1961. No indexation benefit is available. No annual exemption of Rs 1.25 lakh (that exemption is specific to listed equity gains under Section 112A and does not extend to unlisted shares). This means every rupee of LTCG from unlisted shares is taxable from the first rupee. The Section 87A rebate does not apply to gains taxed at a special rate under Section 112. Even if your total income falls below Rs 12 lakh (the new regime rebate threshold), the unlisted share LTCG sits outside that rebate. **Short-term capital gains (holding period 24 months or less)** STCG from unlisted shares is added to total income and taxed at the individual’s applicable income tax slab rate. There is no flat special rate for unlisted STCG, unlike [listed equity STCG](https://treelife.in/taxation/taxation-and-regulatory-framework-for-derivatives-and-equity-investments-in-india/) which is taxed at 20% under Section 111A. This means a founder in the 30% slab pays 30% on STCG from unlisted shares, which is significantly more than the 12.5% LTCG rate. **Surcharge and health and education cess** Total income slabSurcharge rateUp to Rs 50 lakhNilRs 50 lakh to Rs 1 crore10%Rs 1 crore to Rs 2 crore15%Rs 2 crore to Rs 5 crore25% (for STCG; capped at 15% for LTCG)Above Rs 5 crore37% (for STCG; capped at 15% for LTCG)**Important LTCG surcharge cap:** Surcharge on LTCG from all capital assets cannot exceed 15%, regardless of the taxpayer’s total income. This cap makes LTCG particularly beneficial for high-income individuals. An investor with total income above Rs 5 crore pays 37% surcharge on salary or business income but only 15% surcharge on unlisted share LTCG. Health and education cess applies at 4% on the total of income tax plus surcharge, bringing the maximum effective LTCG rate to approximately 14.95% (12.5% × 1.15 × 1.04). **Transitional rule for pre-23 July 2024 acquisitions** For shares purchased before 23 July 2024, taxpayers have the option to compute LTCG under either the old regime (20% with indexation) or the new regime (12.5% without indexation) and pay whichever results in lower tax. This transitional benefit is available only for assets held as of 22 July 2024 and disposed of on or after 23 July 2024. ## How cost of acquisition is determined The computation of capital gains under Section 48 follows the formula: Capital gain = Sale consideration minus Cost of acquisition minus Cost of improvement minus Transfer expenses **For purchased shares:** The actual purchase price, including brokerage or platform fees paid at the time of acquisition. Brokerage and platform fees on the sale side are deductible as transfer expenses under Section 48. **For shares acquired as a gift from a relative:** Under Section 56(2)(x), gifts from specified relatives are exempt from tax in the hands of the recipient. When the recipient later sells those shares, the cost of acquisition is deemed to be the original cost paid by the donor under Section 49(1). The holding period of the donor is also included. The definition of “relative” for this purpose follows the specific list under Section 56: spouse, sibling, spouse’s sibling, parent or parent’s sibling, lineal ascendant or descendant, and their spouses. Cousins, uncles (father’s brother), and aunts who are not the spouse’s sibling fall outside this definition. **For inherited shares:** The cost to the previous owner is adopted as the cost of acquisition. No capital gains tax arises on inheritance itself. **For shares received below FMV from non-relatives:** If you received shares at a price more than Rs 50,000 below their FMV (as computed under Rule 11UA) from someone who is not a relative, the difference is taxed as income from other sources under Section 56(2)(x) in the year of receipt. The FMV itself then becomes the cost of acquisition for future capital gains purposes. For the full secondary sale process including SHA compliance, ROFR, escrow structuring, and pre-sale documentation, see Treelife’s [Selling Founder Shares in India](https://treelife.in/legal/selling-founder-shares-in-india-tax-process-secondary/) guide. ## Section 50CA: the FMV floor on the seller’s side Section 50CA of the Income Tax Act, 1961, introduced by the Finance Act 2017, creates a deemed consideration rule for sellers of unlisted shares. If you transfer unlisted (unquoted) shares at a price below their fair market value, the FMV is treated as the full value of consideration for computing capital gains under Section 48, regardless of what the buyer actually paid. This directly affects secondary sales where founder sells below valuation, distress transfers, related-party transactions at book value, and transfer of shares to employees at below-FMV prices outside exempt schemes. **How FMV is determined under Rule 11UAA and Rule 11UA** For the purpose of Section 50CA, FMV of unquoted equity shares is the higher of two values computed under Rule 11UA(1)(c): Method 1 (NAV): The net asset value formula uses the company’s book value of assets and liabilities as on the valuation date. The formula is: > FMV per share = (A + B + C + D minus L) × PV / PE Where A = book value of all assets, B = value of jewellery or artistic works at FMV, C = fair value of shares in other companies, D = fair value of other investments, L = total liabilities, PV = paid-up value of the specific shares, PE = total paid-up equity. Method 2 (DCF / merchant banker): For unlisted startups and high-growth companies, the NAV method significantly undervalues the company. Under Rule 11UA, the assessee may alternatively rely on a merchant banker’s discounted cash flow (DCF) valuation dated not earlier than 180 days from the date of transfer. **Practical trap:** If you have a merchant banker report that shows Rs 1,000 per share but sell at Rs 400, the income tax department treats Rs 1,000 as your deemed sale price. You pay capital gains on Rs 1,000 minus your cost, not on Rs 400 minus your cost. The difference of Rs 600 per share is not adjustable against any other income. **What Section 50CA does not apply to** Section 47 of the Income Tax Act lists transfers that are not treated as “transfers” for capital gains purposes. Since Section 50CA applies only to a “transfer,” it does not apply to gifts to relatives (Section 47(iii)), transfers under a will or succession (Section 47(iii)), HUF partitions, and amalgamations or demergers covered under Section 47(vi) and 47(vii). However, the moment a transaction is structured as a sale (even at a nominally low consideration), Section 50CA activates if the price is below FMV. ## Section 56(2)(x): the buyer’s exposure on below-FMV acquisitions While Section 50CA targets the seller, Section 56(2)(x) targets the buyer. If you acquire unlisted shares at a price more than Rs 50,000 below their FMV determined under Rule 11UA, the shortfall is taxed in your hands as income from other sources in the year of acquisition. This creates a symmetrical double-sided risk on discounted transfers: PositionSectionTax consequenceSeller (sold below FMV)50CATaxed on FMV as if that were the sale priceBuyer (bought below FMV)56(2)(x)Shortfall from FMV taxed as income from other sourcesThe threshold of Rs 50,000 is absolute: if the total shortfall across all shares acquired in a single transaction is Rs 50,001, the entire amount (not just the excess over Rs 50,000) is taxable. **Exclusions from Section 56(2)(x):** Shares received from a relative as defined in the section, shares received on the occasion of marriage, shares received under a will or succession, shares received from a local authority or specified fund, and shares received in certain restructuring transactions covered under Section 47. The practical implication for secondary buyers in angel and pre-IPO transactions: always obtain a Rule 11UA valuation before closing. If the transaction price is below FMV and you are not covered by an exclusion, you carry a taxable shortfall into your next income tax return, along with a potential mismatch between your ITR and the seller’s ITR. ## ESOP taxation: the cost-of-acquisition trap on secondary sale ESOP shares in unlisted companies carry a specific capital gains trap that does not apply to shares acquired by purchase. The full perquisite and TDS framework at exercise (Stage 1 under Section 17(2)(vi)) is covered in depth in Treelife’s [complete ESOP taxation guide](https://treelife.in/taxation/esop-taxation-in-india/). What matters for a secondary sale is the capital gains computation at Stage 2. **The cost-of-acquisition rule** When you sell ESOP shares, capital gains are computed as: Capital gain = Sale price minus FMV at exercise date minus Transfer expenses The cost of acquisition is the FMV on the exercise date, not the exercise price, and not the grant price. The perquisite tax at Stage 1 has already covered the appreciation from exercise price to FMV, so taxing it again at Stage 2 would be double taxation. This principle is settled under Section 49(2AA) of the Income Tax Act, 1961. The practical consequence: if your company has grown significantly since you exercised, the FMV at exercise (your cost base) is much higher than your exercise price. This reduces your capital gain on sale substantially compared to what most ESOP holders assume when they first model their tax liability. **Holding period** The 24-month clock for LTCG classification runs from the date of allotment (after exercise), not from the date of grant or vesting. Options that were granted three years ago but exercised recently may still produce STCG if allotment was less than 24 months before the sale. For the complete ESOP taxation framework including Stage 1 perquisite computation, FMV valuation rules for unlisted companies under Rule 3(9), TDS obligations, and DPIIT startup deferral, see Treelife’s [ESOP Taxation in India guide](https://treelife.in/taxation/esop-taxation-in-india/). ## What exemptions are available to reduce tax? **Section 54F: reinvestment in residential property** Section 54F of the Income Tax Act, 1961 allows individuals and HUFs to claim an exemption on LTCG from any long-term capital asset (including unlisted shares) by reinvesting the net sale consideration in one residential house property in India. Key conditions: - The asset sold must be a long-term capital asset (held over 24 months for unlisted shares) - The new residential property must be purchased within one year before or two years after the date of transfer, or constructed within three years - The taxpayer must not own more than one residential house on the date of transfer - The exemption is proportionate if only a part of the net consideration is reinvested: Exemption = LTCG × (Amount invested / Net sale consideration) - The cap on reinvestment that qualifies for exemption is Rs 10 crore (applicable from 01 April 2024) - Unutilised amounts must be deposited in the Capital Gains Account Scheme (CGAS) before the ITR filing due date to preserve the exemption Note the distinction from Section 54: under Section 54 (sale of a house), only the capital gains amount needs to be reinvested. Under Section 54F, the full net sale consideration must be reinvested to claim full exemption. This makes Section 54F significantly more capital-intensive for founders with large exit proceeds. **Capital loss set-off and carry forward** Capital losses from unlisted shares can offset capital gains, subject to these rules: - Short-term capital losses can offset both STCG and LTCG in the same year - Long-term capital losses can offset only LTCG; they cannot be set off against STCG - Unabsorbed capital losses can be [carried forward for eight assessment years](https://treelife.in/compliance/section-79-how-a-funding-round-can-kill-your-carry-forward-losses/), provided the ITR was filed on time for the year in which the loss arose - The Finance Act 2025 introduced a rule limiting repeated set-off of the same long-term capital loss. A carried-forward LTCL can now be adjusted only once against gains, removing the ability to roll the same loss across multiple years Comparing a secondary sale with other founder liquidity routes (salary, dividend, and buyback), including tax rates and SHA considerations for each? See Treelife’s [Founder Liquidity in India](https://treelife.in/legal/founder-liquidity-in-india/) guide. ## NRI taxation, TDS under Section 195, and FEMA repatriation NRI shareholders selling shares in Indian unlisted companies are taxed at the same rates as residents: STCG at applicable slab rates, LTCG at 12.5% under Section 112. However, the compliance chain is substantially more involved. **TDS under Section 195** When a resident buyer acquires shares from an NRI seller, the buyer is required to deduct TDS at source under Section 195 before remitting payment. TDS must be deducted on the gross consideration (not on the gain alone) unless the NRI has obtained a lower or nil deduction certificate under Section 197 from the income tax officer. Without a Tax Residency Certificate (TRC) from the seller’s country of residence and a completed Form 10F, the buyer must apply domestic TDS rates without any DTAA benefit. DTAA provisions can reduce or eliminate Indian taxing rights on capital gains for NRI sellers from certain treaty countries (for example, the India-Mauritius, India-Singapore, and India-UAE treaties contain specific capital gains articles), but each treaty must be examined on its own terms. DTAA application is fact-specific and cannot be assumed. **Form 15CA and 15CB** After the sale closes and TDS is paid, the NRI seller needs to file Form 15CA and obtain Form 15CB (a chartered accountant’s certificate) before the bank will process an outward remittance of the sale proceeds. These filings confirm that applicable taxes have been paid. Missing this step does not affect the tax liability but will block repatriation at the bank level. **FEMA pricing compliance** FEMA and the Foreign Exchange Management (Non-Debt Instruments) Rules 2019 prescribe pricing guidelines for share transfers between residents and non-residents. Even if the capital gains tax is correctly paid, a transfer priced outside the permissible band can trigger separate FEMA proceedings. The RBI has prescribed valuation norms that require an internationally recognised valuation methodology for unlisted shares. Operating outside these norms can attract [compounding penalties under FEMA](https://treelife.in/services/secretarial-compliance/fema-compliance/). **NRI basic exemption limitation** Resident individuals can offset capital gains against an unused portion of the basic exemption limit. NRIs generally cannot apply the basic exemption limit against special-rate capital gains. This means an NRI with no other Indian income still pays 12.5% LTCG on every rupee of gain from unlisted share sales. Seller typeLTCG rateBasic exemption offsetIndexationTDS at sourceResident individual12.5%Allowed on unused portionNot available (from 23/07/2024)Not applicable (between residents)NRI12.5%Not allowedNot availableSection 195 applies (buyer deducts)## ITR reporting: which form and which schedule Capital gains from unlisted shares cannot be reported in ITR-1 (Sahaj). The correct forms are: - ITR-2: for individuals and HUFs with capital gains but no business income - ITR-3: for individuals and HUFs who have capital gains alongside income from business or profession (including partners in firms) Within the ITR, unlisted share gains are reported in Schedule CG. STCG from unlisted shares goes under “Short-term capital gains on assets other than listed equity or equity-oriented mutual funds.” LTCG from unlisted shares goes under “Long-term capital gains under Section 112.” Each company’s shares are reported as a separate row, with: date of acquisition, date of transfer, cost of acquisition, sale consideration (or FMV under Section 50CA if higher), and the resulting gain or loss. **Schedule AL disclosure** If unlisted share holdings exceed Rs 5 lakh in cost of acquisition at any point during the financial year, those holdings must be disclosed in Schedule AL (Assets and Liabilities) of the ITR, even in years where no sale has occurred and no capital gains arise. The value disclosed is the cost of acquisition, not current FMV. **Advance tax obligation** Capital gains on unlisted shares are not exempt from advance tax. If the total tax liability for the year exceeds Rs 10,000, advance tax must be paid in four instalments. Shortfalls attract interest under Section 234B (on assessed tax) and Section 234C (on instalment shortfalls). For a large one-time sale with a significant gain, ignoring advance tax can result in meaningful interest charges on top of the base tax liability. ## Common mistakes that generate assessments and penalties **Not reporting unlisted shares in ITR at all** The income tax department receives Annual Information Statement (AIS) data from multiple sources including demat custodians and company registrars. Failing to report a secondary sale creates a direct mismatch between AIS and the filed ITR, which triggers automated scrutiny notices under Section 143(2). **Treating ESOP cost of acquisition as the exercise price** When selling ESOP shares, the capital gain is computed as sale price minus FMV at exercise date, not sale price minus exercise price. Filing with the exercise price as cost overstates the gain. The error shows up as a mismatch against the employer’s Form 26AS records, which log the perquisite value already taxed at exercise. **Selling below FMV without a valuation report** A transaction closed without a fresh Rule 11UA valuation report leaves the seller exposed to Section 50CA reassessment. If the assessing officer obtains an independent valuation showing FMV above the transaction price, the entire shortfall is added to the seller’s capital gains, often with interest and penalty for underreporting. **Ignoring buyer-side Section 56(2)(x) exposure** Buyers who acquire shares at a discount from FMV without checking the Section 56(2)(x) threshold fail to report the shortfall as income from other sources. This creates a mismatch when the seller’s ITR is processed and the transaction price is compared to available valuation data. **NRI seller not obtaining Section 197 certificate before closing** Without a lower deduction certificate, the buyer deducts TDS at full domestic rates on gross consideration. For a large transaction, this can lock up significant funds that the NRI must then recover through ITR filing and refund, which adds time and compliance cost. The certificate should be obtained before the transaction closes, not after. **Missing the advance tax deadline on a large secondary exit** Founders who receive large secondary proceeds in Q1 or Q2 often miss the June or September advance tax instalment, assuming the tax is due only at year-end. The interest under Section 234C on each instalment shortfall compounds across instalments and can amount to a meaningful sum on a crore-level transaction. ## Treelife practitioner note In the secondary sale mandates we have handled at Treelife across startup and founder-owned companies, the most consistent issue is not the rate or holding period. Sellers understand those by the time they engage us. The recurring friction is in three places. First, valuation alignment. We have seen transactions where the seller’s Rule 11UA report (DCF-based, showing a high FMV) conflicts with the buyer’s assessment of value (NAV-based, showing a lower FMV). Under Section 50CA, the seller is protected only by their own valuation report. Under Section 56(2)(x), the buyer is exposed based on the higher FMV. Getting both parties to agree on a valuation methodology before term sheet avoids a situation where the seller is fine but the buyer carries a latent tax exposure that surfaces twelve months later. Second, ESOP cost-of-acquisition errors in secondary transactions. Employees who receive a secondary liquidity offer often model their tax liability using the exercise price as cost base. The correct figure is the FMV at exercise under Section 49(2AA). When the difference is large (a company that has grown significantly since the ESOP grant), the correct cost base produces a materially lower capital gain. Filing on an understated cost base means overpaying tax, which is difficult to recover without a revised ITR and the scrutiny that comes with it. Third, the advance tax timing problem. Promoter-led secondary sales in Q1 are common, but the tax payment mindset tends to be deferred. We routinely help founders set up a payment schedule at transaction close, putting aside the LTCG tax liability in the quarter it arises rather than managing a catch-up payment in March. The Section 234C interest penalty is avoidable and adds no value to the seller. The specific regulatory reference that governs our valuation alignment work is Rule 11UA of the Income Tax Rules, 1962 (as amended), and CBDT Circular No. 225/12/2016/ITA.II for the classification of unlisted share income as capital gains. ## Frequently asked questions **Q: What is the holding period for LTCG on unlisted shares?** A: Under Section 2(42A) of the Income Tax Act, 1961, unlisted shares qualify as a long-term capital asset only after 24 months of holding. Shares held for 24 months or less are short-term assets, and any gain is added to total income and taxed at slab rates. This 24-month rule is distinct from the 12-month rule that applies to listed equity shares. **Q: Is there an exemption limit on LTCG from unlisted shares, like the Rs 1.25 lakh exemption on listed shares?** A: No. The Rs 1.25 lakh annual exemption applies only to LTCG under Section 112A, which covers listed equity shares and equity-oriented mutual fund units where STT has been paid. LTCG on unlisted shares is taxed under Section 112 and carries no such exemption. Every rupee of LTCG from unlisted shares is taxable from the first rupee. **Q: What happens if I sell unlisted shares below the fair market value?** A: Section 50CA of the Income Tax Act, 1961 deems the FMV (computed under Rule 11UAA) to be the full value of consideration for capital gains computation. You are taxed on FMV minus cost of acquisition, not on the actual sale price minus cost. Simultaneously, the buyer may face tax under Section 56(2)(x) if the shortfall between FMV and the price paid exceeds Rs 50,000. **Q: How is the fair market value of unlisted shares calculated?** A: Under Rule 11UA of the Income Tax Rules, 1962, FMV is the higher of: (a) the NAV-based formula (book value of assets minus liabilities, proportionate to the share), or (b) a DCF-based valuation report from a SEBI-registered Category I merchant banker, dated not earlier than 180 days from the transfer date. In practice, high-growth startups use the merchant banker route because the NAV method significantly undervalues companies with intangible assets or strong growth projections. **Q: How much does Treelife typically charge for capital gains advisory on a secondary sale?** A: Advisory fees depend on the complexity of the transaction: number of tranches, ESOP involvement, NRI parties, and valuation requirements. Speak directly with our team at [treelife.in/contact](https://treelife.in/contact/) for a scoped engagement. **Q: How long does it typically take to close a secondary sale with full tax compliance?** A: A straightforward resident-to-resident transfer with a fresh valuation report takes three to four weeks from term sheet to closing, assuming no SHA amendment is required. NRI involvement adds the Form 15CA/15CB cycle and potentially a Section 197 application, which can extend the timeline to six to eight weeks. **Q: What documents are needed for filing capital gains from unlisted shares?** A: The core documents are: share purchase agreement or term sheet, original acquisition documents (subscription agreement, allotment letter), Rule 11UA valuation report (for Section 50CA compliance), bank statement confirming receipt of sale proceeds, demat statement or company register extract, and any Form 16 or TDS certificates relevant to ESOP perquisite (for ESOP holders). **Q: Does FEMA apply to a sale of shares between two residents in an Indian company?** A: FEMA generally governs cross-border transactions. A resident-to-resident transfer of shares in an Indian company does not fall under FEMA unless the shares have a prior foreign investment history (downstream investment chain) or the company itself has specific sector-level foreign investment restrictions. NRI-to-resident or resident-to-NRI transfers are governed by FEMA and the Foreign Exchange Management (Non-Debt Instruments) Rules 2019. **Q: What happens if the company lists after I have acquired unlisted shares?** A: The tax treatment changes from the date of listing. Shares sold post-listing are taxed as listed equity gains, and the 12-month holding period applies from the date of listing (not from your original acquisition). LTCG above Rs 1.25 lakh on listed equity is taxed at 12.5% under Section 112A. STT will apply on exchange-based sales post-listing. **Q: Can a co-founder transfer shares to a spouse without a tax consequence?** A: The transfer itself is excluded from capital gains under Section 47(iii) of the Income Tax Act, 1961 if it is a gift. The receiving spouse does not pay tax under Section 56(2)(x) because spouses are specified relatives. However, clubbing provisions under Section 64 apply: any income (including capital gains) earned by the spouse from the gifted shares is clubbed with the transferor’s income and taxed in the transferor’s hands. The clubbing applies as long as the relationship of spouse subsists. **Q: How are capital losses from unlisted shares treated?** A: STCL from unlisted shares can be set off against any STCG or LTCG in the same year. LTCL from unlisted shares can be set off only against LTCG. Unabsorbed losses are carried forward for eight assessment years, but the carry-forward is available only if the ITR was filed on time for the year in which the loss arose. A loss return filed after the due date under Section 139(4) cannot carry forward capital losses. **Q: Are ESOP shares taxed differently from shares acquired by purchase?** A: Yes, on the capital gains side. The cost of acquisition for ESOP shares is the FMV on the exercise date, not the exercise price and not the grant price. This is because perquisite tax was already paid on the exercise date gain under Section 17(2)(vi). Capital gains are computed as sale price minus that FMV. The holding period for LTCG runs from the date of allotment after exercise. **Q: What is the tax position for an NRI selling shares of an Indian unlisted company to a resident?** A: The NRI is taxed at the same rates as a resident (12.5% LTCG under Section 112, slab rate for STCG) but cannot offset gains against the basic exemption limit. The resident buyer must deduct TDS under Section 195 before remitting payment. The NRI must provide a Tax Residency Certificate and Form 10F to claim DTAA benefits. After the sale, Form 15CA and Form 15CB are required before the bank will process the outward remittance. FEMA pricing norms also apply to the transaction, and the price must be within the permissible band under the Foreign Exchange Management (Non-Debt Instruments) Rules 2019. **Regulatory references**: - Income Tax Act, 1961: Sections 2(42A), 45, 47, 48, 49(1), 49(2AA), 50CA, 56(2)(x), 87A, 111A, 112, 112A, 195, 197 - Income Tax Rules, 1962: Rules 11U, 11UA, 11UAA - CBDT Circular No. 225/12/2016/ITA.II dated 02 May 2016 (classification of unlisted share income as capital gains) - Finance (No. 2) Act, 2024 (amendment to LTCG rate on unlisted shares, effective 23 July 2024) - Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 - FEMA 1999 [ Read as Markdown](https://treelife.in/taxation/tax-on-sale-of-unlisted-shares/?format=markdown) ### Related posts: 1. [Taxation of Virtual Digital Assets(VDA) in India – Complete Guide](https://treelife.in/taxation/taxation-of-virtual-digital-assets/ "Taxation of Virtual Digital Assets(VDA) in India – Complete Guide") 2. [Taxation & Regulatory Framework for Derivatives and Equity Investments in India](https://treelife.in/taxation/taxation-and-regulatory-framework-for-derivatives-and-equity-investments-in-india/ "Taxation & Regulatory Framework for Derivatives and Equity Investments in India") 3. [Tiger Global Ruling: Supreme Court on TRCs, Treaty Protection and Offshore Structures](https://treelife.in/taxation/tiger-global-ruling-supreme-court-on-trcs-treaty-protection-and-offshore-structures/ "Tiger Global Ruling: Supreme Court on TRCs, Treaty Protection and Offshore Structures") 4. 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