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Capital Gains from Unlisted Shares India 2021

Today we shall discuss about Capital Gains from Unlisted Shares India 2021. One of the clients was in possession of unlisted shares. He sold these unlisted shares and invested entire proceeds in buying his first ever residential property. His query was what kind of tax he needs to pay? Lets see all aspects around it.

What is Unlisted Shares

An unlisted security is a financial instrument that is not traded on a formal exchange because it does not meet listing requirements. Trading of unlisted securities is done on the over-the-counter (OTC) market and they are often called OTC securities. Market makers, or dealers, facilitate the buying and selling of unlisted securities on the OTC market.

Unlisted securities are usually issued by smaller or new firms that cannot or do not wish to comply with the listing requirements, such as market capitalization thresholds or a willingness to pay the listing fees, of an official exchange. Furthermore, because they are not exchange traded, unlisted securities are often less liquid than listed securities. 

Some familiar names like Hero Fincorp, HDB, Fino Paytech and HDFC securities limited are examples of unlisted companies. They are also sometimes called Pre-IPO shares because they may get listed into exchange in near future.

But be careful as unlisted securities are often less liquid, highly risky and see huge volatility in their prices vs their listed counterparts.

What is the Income Tax treatement of capital gains from unlisted shares in India?

If these share were held for more than 24 months, then any capital gains arising out of them would be considered Long Term Capital Gains (LTCG). 

The LTCG arising from transfer of unlisted shares, whether in demat form or physical form, after holding them for a period of more than 24 months, shall be chargeable to tax at the rate of 20 per cent with indexation.

If it is a long term capital gain, one can claim exemption under section 54F for reinvestment in residential house property.

Please note that in order to claim exemption, you need to invest the entire sales consideration from sale of unlisted shares.

What is Section 54F of the Income Tax Act?

Provisions of section 54F of the Income Tax Act provides exemption towards long term capital gain (other than a residential house) when the amount is invested in purchasing or constructing a new residential house property. The entire provisions of section 54F are explained in the present article.

Conditions for availing exemption under section 54F

The assessee needs to satisfy the following conditions in order to avail exemption under section 54F of the Income Tax Act:

  1. An exemption under section 54F is available only to an individual or a Hindu Undivided Family (HUF).
  2. An exemption is available towards the capital gain arisen on the transfer of any long term capital asset other than a residential house.
  3. The ‘net consideration’ arisen on the transfer of long term capital asset is invested in either of the following manners: 
    a) The amount is invested to purchase one residential house in India. It is compulsory that such investment is made within a period of 1 year before or 2 years after the date of transfer; or
    b) The amount is invested, within a period of three years, to construct one residential house in India.

The exemption under section 54F is not available under the following circumstances:

The assessee already owns more than one residential house on the date of transfer of the long term capital assets.

The assessee purchases additional residential house (other than the new residential house purchased/ constructed to claim an exemption under section 54F is claimed) within a period of one year from the date of transfer of the long term capital asset.

The assessee constructs additional residential house (other than the new residential house purchased/ constructed to claim an exemption under section 54F is claimed) within a period of three years from the date of transfer of the long term capital asset.

In the aforesaid three cases, the amount of capital gains arising from the transfer of the original asset, which was not charged to tax, will be deemed to be the income by way of long term capital gains of the year in which new house is transferred or another residential house (other than the new house) whose income is taxable under the head ” Income From House Property” is purchased or constructed, as the case may be.

It is important that, in the cases above, the income from the residential house (other than the one owned on the date of transfer of the long term capital asset) is chargeable under the head ‘Income from house property’.

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Amount of exemption available under section 54F

Section 54F of the Income Tax Act provides exemption as under

ParticularsAmount of exemption
When full net consideration is invested The full amount of long term capital gain is exempt
When proportionate net consideration is invested ExemptionExemption + Long term capital gain * Amount re-invested / Net consideration


Summary of provisions of section 54F of the Income Tax Act

Here is the entire summary of provisions of section 54F of the Income Tax Act

 
Nature of assessee eligible for exemptionIndividual or HUF
Nature of capital asset transferredLong term capital asset other than the residential house
Nature of re-investmentPurchased one residential house within one year before or two years after the date of transfer; or

Constructed one residential house within three years from the date of transfer.

Withdrawal of exemptionIf the purchased or constructed residential house is transferred before three years.
Capital Gain Deposit Account SchemeIf the amount is not re-invested by the last day of filing of the return, then, the balance amount should be deposited in the capital gain deposit account scheme.

 

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