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What Are Unlisted Shares? Meaning & Tax Explained

What Are Unlisted Shares? Meaning & Tax Explained

Unlisted shares are shares of companies not listed on stock exchanges like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE). This means you cannot buy or sell them through regular trading apps or platforms. These shares are owned by private companies or startups. People invest in them before the company goes public or gets listed. While they are harder to sell than listed shares, they can offer good returns if the company grows well.

However, you should also understand how taxes work on these shares, as they affect your final profit.

Types of Unlisted Shares

Unlisted shares come in different types, each with its own purpose and investment approach. Here are some common types of unlisted shares you may come across:

 

Type of Unlisted Share Meaning
Pre-IPO Shares Shares of companies that plan to go public soon
ESOPs (Employee Stock Ownership Plans) Shares given to company employees as part of their salary
Private Placements Shares bought directly from the company or its promoters
AIFs (Alternative Investment Funds) Investment funds that include unlisted shares in their portfolios

These shares are mostly bought through brokers or special platforms that deal in unlisted shares.

Why Invest in Unlisted Shares?

Investing in unlisted shares is becoming popular among investors looking for unique opportunities. These shares often belong to promising companies before they go public, offering exciting growth potential.

  • Early Entry: Get access to companies in their growth stage before they are listed.
  • High Return Potential: Earn significant returns if the company performs well after listing.
  • Portfolio Diversification: Add a new asset class to balance risks.
  • Better Valuation: Often available at attractive valuations before the IPO launch.

How to Buy and Sell Unlisted Shares in India?

Buying and selling unlisted shares in India is simple if you follow the right steps. These shares are often traded privately and require a bit of research before investing. To begin, make sure you open a Demat account—it’s essential for holding and transferring unlisted shares.

Step 1: Visit Findoc’s website to explore available unlisted share options.

Step 2: Check the company’s background, financials, and growth potential.

Step 3: Buy shares through private deals, employee ESOPs, or pre‑IPO platforms.

Step 4: Shares are safely transferred to your Demat account.

Step 5: Hold them for long-term growth or sell when a buyer is available or the company gets listed.

Taxation of Unlisted Shares: Long‑Term vs Short‑Term

Understanding the tax on unlisted shares is important because it directly affects your overall returns. Tax rates vary depending on how long you hold the shares before selling them.

Holding Period Tax Type Tax Rate (New Regime)
More than 24 months Long-Term Capital Gains (LTCG) 12.5% (no indexation)
Less than 24 months Short-Term Capital Gains (STCG) As per your income tax slab

For example: If you buy unlisted shares worth ₹1,00,000 and sell them after 3 years for ₹2,00,000, your gain is ₹1,00,000. You’ll pay 12.5% tax on ₹1,00,000, which is ₹12,500. With Findoc’s expert support and easy-to-use tracking tools, managing your unlisted share investments and their taxes becomes simple and hassle-free.

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Key Tax Rules & Filing Guidelines (ITR Forms, Gift Tax, Indexation)

Filing taxes for unlisted shares can feel tricky, but following the right rules keeps you compliant and stress‑free. Here are the key guidelines for unlisted shares taxation you should know:

  • Use ITR-2 or ITR-3 to file tax for unlisted share gains.
  • Report long‑term gains under Schedule CG – Point B9 and short‑term gains under Schedule CG – Point A5.
  • If you receive shares as a gift, you still need to pay capital gains tax when you sell them.
  • Indexation benefits are not allowed under the new tax rules.
  • Always declare unlisted shares in your Income Tax Return.

Risks and Pitfalls of Unlisted Shares

  • While unlisted shares offer exciting opportunities, they also come with certain challenges that investors should be aware of before making a decision. Here are some key points to keep in mind:
  • Lower Liquidity: Finding buyers or sellers can take time compared to listed shares.
  • Valuation Uncertainty: Prices may not always reflect real market value due to limited trading data.
  • Regulatory Risk: Rules for unlisted shares can differ and may change over time.
  • Longer Lock‑In Periods: Investments may be tied up until listing or a buyer is found.
  • Higher Risk Exposure: Early-stage companies can be more volatile and unpredictable.

Tips for Due Diligence Before Buying Unlisted Shares

  • Before investing in unlisted shares, it’s essential to do proper due diligence. This helps you avoid unnecessary risks and make informed decisions about your money. Here’s what you should check:
  • Review the company’s financial statements and overall performance.
  • Understand the business model and revenue sources to know how the company earns money.
  • Check past investor activity and fund-raising rounds for credibility.
  • Verify shareholding details with a reliable and trusted broker
  • Ask questions about risks, lock-in period, and exit options to plan your investment strategy better.

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Frequently Asked Questions

Unlisted shares are shares of firms that are not traded on an exchange like NSE or BSE; hence, they cannot be traded using retail stock trading apps.

Unlisted shares are sold privately through the agency of brokers, investment houses, or company employees. These are off-market transactions because they are not sold on an exchange.

When you sell the unlisted shares within 24 months after purchase, the gain is a Short-Term Capital Gain (or short-term gain); when you sell the unlisted shares after 24 months, then the gain is a Long-Term Capital Gain (or long-term gain).

Fair Market Value (FMV) is the price at which the share would be realised in an open market. For purposes of taxation, one is usually paid by a merchant banker or transactions in terms of similar recent transactions.

Yes, but indirectly. Retail investors can purchase pre-IPO shares from good brokers or investment websites that quote their transactions ahead/share pre-IPO shares.

Investors are not required to obtain approval for purchasing unlisted shares. However, issuers of unlisted shares will have to comply with SEBI and Companies Act regulations, particularly in the case of private placements.