Lately, the unlisted markets are having their own moment. Investors are buying unlisted shares of well-known companies before they go public. This is because some companies are delivering solid returns post IPOs, and the increasing participation in IPOs has made securing an allotment more challenging. Buying unlisted shares allows investors to bypass the IPO lottery system, ensuring they already hold shares before public trading begins.
Now, while the potential for high returns can be appealing, unlisted shares come with their own set of cons.
- Limited liquidity: Unlisted stocks are not traded on a public exchange, meaning there’s a smaller pool of potential buyers. This lack of demand can make it hard to sell your shares when needed.
- Low transparency: Unlisted companies don’t have to disclose as much information as listed companies, making it harder to predict their growth or assess their financial health.
- Lock-in period after IPO: If the company eventually goes public, your unlisted shares will be locked in for six months, meaning you won’t be able to sell them immediately after the IPO and earn listing day gains.
Tax on selling unlisted shares
Unlisted shares are typically bought and sold through brokers or directly from companies’ employees/early investors. If you hold unlisted shares and sell them before the company is listed, the tax implications are as follows:
What happens when the company gets listed?
Once the company announces the IPO and gets listed, your unlisted shares get locked in for 6 months. Hence, you’ll only be able to sell them after the expiry of this lock-in period. Now as the company is listed, the capital gains on these shares will be taxed as follows.
The holding period is calculated from the day you purchased the shares and not from the day the company is listed.
Disclosing unlisted shares in the ITR
Unlike listed shares, which only need to be reported when sold, unlisted shares must be disclosed in your income tax return (ITR) even if you haven’t sold them. To disclose them:
- Use ITR-2 if you don’t have income from business or profession.
- Use ITR-3 if you have business or professional income.
You will have to disclose unlisted shares under the section ‘Schedule Part A - General Information’ of the ITR form.
What happens if you sell unlisted shares at a loss?
You can claim these losses by filing your ITR and use them to offset other capital gains. However, the set-off rules will differ based on whether the losses are short-term or long-term.
Here’s a detailed video on Unlisted shares.
