Key Takeaways
- Unlisted shares held for more than 24 months qualify as long-term. LTCG is taxed at a flat 12.5% under Section 112 (Finance Act 2024). No indexation benefit.
- Shares held 24 months or less are short-term. STCG is added to your total income and taxed at your slab rate.
- The seller's sale consideration cannot be lower than the Fair Market Value under Rule 11UA. If you sell below FMV, the Income Tax Department treats FMV as your deemed sale price (Section 50CA).
- Buyers who receive shares below FMV face tax under Section 56(2)(x) on the difference.
- Section 87A rebate does not apply to LTCG taxed under Section 112. Even if your total income is under Rs 12 lakh, LTCG on unlisted shares is taxed separately.
- File using ITR-2 (no business income) or ITR-3 (with business income). Report gains in Schedule CG.
What is the capital gains tax on sale of unlisted shares in India for AY 2026-27? Long-term capital gains on unlisted shares (held over 24 months) are taxed at 12.5% under Section 112, with no indexation benefit (Finance Act 2024, effective 23 July 2024). Short-term gains are taxed at your income tax slab rate. The cost of acquisition must be determined using Fair Market Value rules under Rule 11UA. (Source: Section 112, Income Tax Act 1961; Finance (No. 2) Act, 2024)
If you hold shares in a private limited company, received ESOPs from a startup before its IPO, or sold equity through an off-market transaction, the tax treatment is different from listed shares. There is no STT, no Rs 1.25 lakh annual exemption, and no Section 111A or 112A protection. You are in the territory of Section 112 (LTCG) and slab-rate STCG, with Fair Market Value rules that can catch both sellers and buyers off guard.
This guide covers every aspect of unlisted share taxation for AY 2026-27 (FY 2025-26), with verified rates, a worked example, and the FMV traps that trip up founders, angel investors, and ESOP holders.
Looking for expert help with capital gains tax on unlisted shares India? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.
What Counts as an Unlisted Share?
Any share not listed on a recognised stock exchange in India is an unlisted share. This includes:
- Private limited company shares (the most common case)
- Startup ESOPs exercised before the company lists on an exchange
- Pre-IPO shares bought through secondary markets
- LLP converted to company shares (where the LLP converted to a private limited)
- Bonus shares or rights shares in private companies
- Shares in foreign companies (for resident Indians, covered under separate provisions but the holding period and rate are the same)
The key test is simple: on the date you sell the shares, are they listed on BSE, NSE, or any other recognised exchange? If not, they are unlisted.
LTCG vs STCG: The 24-Month Threshold
Unlike listed equity (where long-term kicks in at 12 months), unlisted shares require a 24-month holding period for LTCG classification (Section 2(42A) of the Income Tax Act 1961).
| Holding Period | Classification | Tax Rate |
|---|---|---|
| More than 24 months | Long-term capital gain (LTCG) | 12.5% flat (Section 112) |
| 24 months or less | Short-term capital gain (STCG) | Slab rate (added to total income) |
The holding period starts from the date of allotment (not the date you paid). For shares received through an ESOP, it starts from the date of exercise (when shares were actually allotted to you), not the grant date or the vesting date.
For shares received as a gift or inheritance, the holding period of the previous owner is included. If your father held the shares for 20 months and gifted them to you, and you hold them for 5 months before selling, your total holding period is 25 months. That is long-term.
Tax Rate Chart
Capital Gains Tax on Unlisted Shares: AY 2026-27
Rates effective for transfers on or after 23 July 2024
LTCG (held > 24 months)
Section 112. No indexation. No Rs 1.25 lakh exemption (that is only for listed equity under 112A).
STCG (held ≤ 24 months)
Added to total income. Taxed at 5% / 10% / 15% / 20% / 25% / 30% per applicable new regime slab.
Surcharge on LTCG (income > Rs 50L)
Maximum surcharge on capital gains capped at 15% regardless of income level.
Source: Section 112, Income Tax Act 1961 | Finance (No. 2) Act, 2024 | Section 2(42A)
What Changed After July 23, 2024
Before the Finance Act 2024, unlisted shares LTCG was taxed at 20% with indexation (cost inflation index adjustment). The July 2024 amendment changed this to 12.5% without indexation. Whether the old or new rate is better for you depends on how long you held and how much the CII adjusted your cost.
For a share bought in FY 2015-16 (CII 254) and sold in FY 2025-26 (CII 363), the indexed cost would be 1.43x the actual cost. If your actual gain is large relative to the cost, 12.5% without indexation could be lower than 20% with indexation. Run both calculations for transactions that straddle the July 2024 date.
Important: Unlike immovable property, there is no grandfathering or choice between old and new rate for unlisted shares. The 12.5% rate applies mandatorily for all transfers on or after 23 July 2024.
How to Determine Fair Market Value (Rule 11UA)
FMV of unlisted shares matters at multiple points: at the time of purchase (for Section 56(2)(x) check), at exercise (for ESOPs), and at sale (for Section 50CA check). Rule 11UA of the Income Tax Rules prescribes the methods.
For Equity Shares
Method 1: Net Asset Value (NAV) / Book Value Method
FMV per share = (A - L) / T
Where:
- A = book value of all assets (not including provisions and contingent liabilities) on the valuation date, as per the latest audited balance sheet
- L = book value of all liabilities (not including equity, reserves, and surplus) as per the same balance sheet
- T = total number of equity shares outstanding
This is the default method that the assessing officer will apply if no valuation report is provided.
Method 2: Discounted Cash Flow (DCF) Method
A merchant banker registered with SEBI provides a DCF-based valuation. The company projects future cash flows, and the valuation report assigns a per-share FMV. This method typically results in a higher valuation than NAV (beneficial for sellers, problematic for buyers under Section 56(2)(x)).
Which method to use? Rule 11UA says FMV is the higher of:
- NAV method value, OR
- The value determined by a SEBI-registered merchant banker (DCF or other accepted method)
In practice, most startup share transfers use a merchant banker valuation report because the NAV method undervalues high-growth companies with intangible assets.
Step-by-Step Guide
Steps to Compute Capital Gains on Unlisted Shares
Follow this sequence for every unlisted share transaction
Determine the holding period
Count from date of allotment (or date of acquisition by the previous owner if received as gift/inheritance) to date of transfer. More than 24 months = LTCG.
Establish the cost of acquisition
For purchased shares: actual purchase price. For gifted shares: cost to the previous owner. For inherited shares: cost to the previous owner. For ESOP shares: FMV on the date of exercise.
Determine sale consideration
Actual sale price, BUT if it is less than FMV under Rule 11UA, the FMV becomes the deemed sale consideration under Section 50CA.
Calculate capital gain
Sale consideration (or deemed consideration) minus cost of acquisition minus transfer expenses (brokerage, stamp duty, legal fees).
Apply tax rate and pay advance tax
LTCG at 12.5% (Section 112), STCG at slab rate. Pay advance tax in the quarter the gain arises if total tax liability exceeds Rs 10,000.
Source: Section 112, Section 50CA, Rule 11UA, Income Tax Act 1961
Section 50CA: The Seller's FMV Floor
Section 50CA is the provision that catches sellers who under-report the sale price of unlisted shares.
If you transfer unlisted shares for a consideration less than the FMV determined under Rule 11UA, the FMV is treated as your deemed full value of consideration. You pay capital gains tax on FMV minus cost, not on the actual sale price minus cost.
Example: You sell shares in your private company to your business partner for Rs 50 per share. The Rule 11UA NAV comes to Rs 120 per share. For capital gains computation, Rs 120 is your deemed sale consideration, not Rs 50. If your cost was Rs 30, your capital gain is Rs 90 per share, not Rs 20.
Exemptions from Section 50CA: Transfers covered under Section 47 (gift to a relative, transfer under a will, HUF partition, amalgamation, demerger) are not transfers for capital gains purposes, so Section 50CA does not apply to them.
Section 56(2)(x): The Buyer's Tax Trap
While Section 50CA protects the revenue from under-reported sale prices, Section 56(2)(x) catches the buyer who acquires shares below FMV.
If you receive unlisted shares for a consideration less than FMV (as determined under Rule 11UA), and the difference exceeds Rs 50,000, the entire difference is taxed as "income from other sources" in your hands.
| Scenario | Tax Impact on Buyer |
|---|---|
| Shares received without consideration (gift from non-relative) | Full FMV taxable as income from other sources |
| Shares purchased for less than FMV (difference > Rs 50,000) | (FMV minus purchase price) taxable as income from other sources |
| Shares received from a relative (as defined in the Act) | Exempt (no tax under Section 56(2)(x)) |
| Shares received under a will or inheritance | Exempt |
"Relative" for this purpose includes spouse, brother, sister, parents, and lineal ascendants/descendants (and their spouses). Cousins, uncles, and aunts are not relatives under this definition.
Worked Example: Selling Startup Shares
Facts: Priya, a salaried employee, exercised 5,000 ESOPs in her startup employer (an unlisted private limited company) in October 2023 at an exercise price of Rs 10 per share. The FMV on the exercise date was Rs 80 per share. She already paid perquisite tax on the Rs 70 difference (Rs 3,50,000 added to her salary income in AY 2024-25).
In December 2025, she sells all 5,000 shares to an external investor for Rs 200 per share.
Holding period: October 2023 to December 2025 = 26 months. This is long-term (more than 24 months).
Cost of acquisition: Rs 80 per share (the FMV at exercise, not the exercise price of Rs 10. Using Rs 10 would result in double taxation because the perquisite tax already covered the Rs 10 to Rs 80 difference).
Sale consideration: Rs 200 per share. Assume the Rule 11UA FMV is Rs 190 per share. Since the actual sale price (Rs 200) exceeds FMV (Rs 190), Section 50CA does not apply. Rs 200 is the sale consideration.
Comparison
Worked Example: Priya's Unlisted Share Sale
5,000 shares, purchased via ESOP exercise Oct 2023, sold Dec 2025
| Parameter | Calculation | Amount |
|---|---|---|
| Sale price per share | Actual sale price | Rs 200 |
| Cost of acquisition per share | FMV at ESOP exercise | Rs 80 |
| LTCG per share | Rs 200 − Rs 80 | Rs 120 |
| Total LTCG | Rs 120 × 5,000 shares | Rs 6,00,000 |
| Tax at 12.5% | Rs 6,00,000 × 12.5% | Rs 75,000 |
| Cess at 4% | Rs 75,000 × 4% | Rs 3,000 |
| Total tax on LTCG | Tax + cess | Rs 78,000 |
Source: Section 112, Income Tax Act 1961 | Finance (No. 2) Act, 2024
Priya's effective tax rate on the Rs 6 lakh gain is about 13%. If she had sold within 24 months (short-term), the Rs 6 lakh would have been added to her salary income and taxed at her slab rate, which could be 20-30% depending on her total income. Holding for 26 months saved her between Rs 42,000 and Rs 1,02,000 in tax.
Advance tax obligation: Since Priya sold in December 2025 (Q3 of FY 2025-26), she should pay the Rs 78,000 as advance tax by 15 December 2025 (the Q3 advance tax due date). Missing this attracts interest under Section 234C at 1% per month.
Cost of Acquisition: Special Cases
The cost of acquisition depends on how you got the shares:
| How Shares Were Acquired | Cost of Acquisition | Section |
|---|---|---|
| Purchased outright | Actual purchase price | General rule |
| ESOP / stock options | FMV on date of exercise | Section 49(2AA) |
| Gift from a relative | Cost to the previous owner (the giftor) | Section 49(1) |
| Inheritance / will | Cost to the previous owner (the deceased) | Section 49(1) |
| Bonus shares | Nil (Rs 0) | Section 55(2)(b) |
| Rights shares | Actual amount paid for the rights issue | General rule |
| Share split | Original cost divided proportionally | General rule |
For gifted shares, if the giftor also received them as a gift, you trace back to the original person who actually purchased them. The cost of that first purchaser is your cost.
How to Report Unlisted Share Gains in Your ITR
File ITR-2 if you have salary, capital gains, and other income but no business income. File ITR-3 if you also have business or professional income.
In Schedule CG (Capital Gains), report under:
- Section B3: Long-term capital gains on assets other than listed equity (Section 112)
- Section A3: Short-term capital gains on assets other than listed equity (at slab rate)
You will need:
- Date of acquisition and date of transfer
- Cost of acquisition (with supporting documentation)
- Full value of consideration (sale price or Rule 11UA FMV, whichever is higher)
- Deductions: transfer expenses (brokerage, legal fees, stamp duty)
No deduction is available under Section 54 or 54F for reinvestment of gains from unlisted shares into a residential house, unless the unlisted shares themselves are a long-term asset. Section 54F does apply to LTCG on unlisted shares reinvested in a residential property (because the asset sold is not a residential house). Read our Section 54/54F guide for the conditions and limits.
What Mistakes Cost People Money?
1. Using the exercise price instead of FMV as cost for ESOPs. If your company allotted shares at Rs 10 (exercise price) and FMV was Rs 80, your cost for capital gains is Rs 80, not Rs 10. Using Rs 10 means you pay capital gains tax on the Rs 70 difference that was already taxed as a perquisite.
2. Ignoring Section 50CA. Transferring shares to a family member at a token price does not reduce your tax. If the Rule 11UA FMV is Rs 500 per share and you sell at Rs 10, the department deems Rs 500 as your sale consideration. Gift it instead (to a relative as defined in the Act) to avoid both 50CA and 56(2)(x).
3. Not getting a valuation report before the transaction. A DCF valuation from a SEBI-registered merchant banker is your best defence against both Section 50CA (for the seller) and Section 56(2)(x) (for the buyer). Getting the report after the transaction, with retrospective numbers, invites scrutiny.
4. Missing advance tax on a large gain. Unlike salary where TDS covers your liability, capital gains on unlisted shares have no TDS mechanism between individuals. You must self-assess and pay advance tax by the quarterly due dates. Missing the December or March deadline means 1% per month interest under Section 234C.
5. Treating the gain as business income. If you trade shares frequently as a business activity, the Income Tax Department may classify the gains as business income (taxed at slab rate, no LTCG benefit). For most one-time sellers (founders selling stakes, employees selling ESOPs), the gain is capital gain. But if you buy and sell shares in multiple companies regularly, maintain proper documentation of your intent to hold as investment.
Frequently Asked Questions
Is there any exemption threshold for LTCG on unlisted shares like the Rs 1.25 lakh for listed equity?
No. The Rs 1.25 lakh annual exemption under Section 112A applies only to listed equity and equity mutual funds where STT is paid. Unlisted shares LTCG under Section 112 has no such exemption. Even Rs 1 of LTCG on unlisted shares is taxable at 12.5%.
Can I claim indexation benefit on unlisted shares sold after July 23, 2024?
No. The Finance Act 2024 removed indexation for all non-equity assets (including unlisted shares) transferred on or after 23 July 2024. The rate is a flat 12.5% on actual gain (sale price minus actual cost).
Does Section 87A rebate apply to reduce my LTCG tax on unlisted shares?
No. LTCG taxed under Section 112 is specifically excluded from Section 87A rebate eligibility. Even if your total income is below Rs 12 lakh under the new regime, LTCG on unlisted shares will still be taxed at 12.5%.
How is FMV determined if the company has no audited balance sheet?
Rule 11UA requires FMV to be computed from the latest audited balance sheet. If no audited balance sheet is available, the assessing officer may direct the company to get one prepared, or use a valuation report from a SEBI-registered merchant banker. In practice, unaudited companies face higher scrutiny.
What if I sell unlisted shares at a loss?
Long-term capital loss on unlisted shares can be set off against any LTCG (including listed equity LTCG) in the same year. Unabsorbed LTCL can be carried forward for 8 assessment years. Short-term capital loss can be set off against both STCG and LTCG.
Is there any TDS on sale of unlisted shares between two individuals?
Generally, no TDS applies on sale of unlisted shares between individuals. However, if a company buys back its own shares, the buyback is taxed under Section 115QA at 20% in the company's hands (not the shareholder's). For NRI sellers, TDS under Section 195 applies at applicable rates.
I received startup ESOPs. When does the 24-month holding period start?
The holding period for ESOP shares starts from the date of exercise (allotment of shares), not the grant date or vesting date. If your options vested over 4 years but you exercised them all in one go in March 2024, the 24-month clock starts in March 2024.
Can I invest unlisted share LTCG in a residential property to save tax under Section 54F?
Yes. Section 54F exemption is available when you sell any long-term capital asset other than a residential house and reinvest the net sale consideration in a residential property. Unlisted shares qualify. You must not own more than one residential house on the date of sale, and the investment must be made within the prescribed time limits.
Tax Garden Handles Unlisted Share ITR Filing
Computing capital gains on unlisted shares involves FMV validation, Rule 11UA compliance, and proper Schedule CG reporting that most ITR software does not handle well. Tax Garden's compliance team calculates the gain, checks Section 50CA applicability, and files your ITR-2 or ITR-3 correctly. See our income tax filing plans.
