How to calculate capital gains tax on unlisted shares

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As markets rise, any investors are looking at picking stocks of unlisted firms from the grey market. Some stocks such as HDB Financial Services Ltd and Studds Accessories Ltd are popular in the grey market. Individuals are also investing in shares of companies that could go for an initial public offering (IPO), hoping to make gains in such trades.

Calculating tax on stocks listed on an exchange is easier. Equities sold within a year is taxed at 15% (short-term capital gaihttps://www.livemint.com/money/personal-finance/form-16-deadline-extended-more-time-for-saving-capital-gains-tax-on-property-11624642235088.htmlns). If an investor holds equities for over a year, profits in excess of 1 lakh are taxed at 10%.

But unlisted securities are taxed differently. In this case, if the stock is sold within 24 months, it’s considered short term. The gains are added to the income of the person and taxed at a marginal rate.

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The profits from stocks sold after holding them for over 24 months are taxed as long-term capital gains. Such gains are taxed at 20% after indexation.

However, when it comes to unlisted securities, there’s a concept called fair market value (FMV). The company appoints a merchant banker that fixes the FMV of its stocks. If the taxpayer sells stocks below the FMV, the income tax authorities will consider the FMV as the selling price.

But what happens that a stock you purchased in the grey market goes for an IPO?

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Once a company is listed on a stock exchange, the unlisted or pre-IPO shares get locked for one year. So, if you had purchased stocks of an unlisted company and sell them on the stock exchange after listing, you will need to pay the same tax that you pay for listed security – 10% long-term capital gains beyond the 1 lakh threshold.

(Do you have personal finance queries? Send them to [email protected] and get them answered by industry experts)

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