A Guide to Unlisted Stocks Investing Beyond the Market

Investing in the stock market can be a powerful tool for long-term wealth creation and financial security. While selecting stocks and tracking market trends may capture your attention, the impact of taxes is often overlooked. However, taxes play a crucial role in shaping your investment returns and financial strategy. Understanding how they apply to your stocks is key to maximizing gains and avoiding unexpected liabilities.

What are unlisted shares?

Unlike publicly listed companies whose shares are available for trading on established stock markets, unlisted shares are not listed on recognised stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE). Unlisted shares may be privately held by a limited number of investors in the company's pre-IPO (Initial Public Offering) stage.

Irrespective of how these shares are traded, their sale and purchase do qualify for capital gains tax.

Capital gains tax on unlisted shares

Unlisted shares taxation in India is divided into two categories:

1. Long-Term Capital Gain Tax: If an investor sells an unlisted stock that has been held for more than 24 months or two years, any gain from the sale is categorised as a Long-Term Capital Gain (LTCG). LTCG earned from unlisted stocks is taxed at 12.5% without indexation.

2. Short-Term Capital Gain Tax: If an investor sells an unlisted stock that has been held for up to 24 months or two years, any gain from the sale is a Short-Term Capital Gain (STCG).

STCG earned from unlisted stocks is taxed as per the investor's tax slab for the year. These profits are added to the total taxable income for the concerned year and taxed as per the prevailing income tax laws.

An important point to note about unlisted shares taxation is that there is no Securities Transaction Tax (STT) on these stocks.

How to Buy Unlisted Shares?

Direct Purchase from the Company – HNIs, VCs, and institutions can acquire pre-IPO shares directly from companies, often at a discount. Due diligence is essential.

• Unlisted Shares Brokers – Brokers facilitate buying and selling, providing pricing insights and market data. Ensure credibility before transacting.
• Grey Market Stocks – Investors can trade shares before an IPO, but the market is unregulated and carries higher risk.
• Alternative Investment Funds (AIF) – Offers structured exposure to unlisted shares, typically for HNIs.
• Private Placements – Companies raise capital by selling shares to select investors before going public, offering high-risk, high-reward opportunities.
• Pre-IPO Shares – Investors buy shares before an IPO at lower prices, with the potential for strong returns but higher uncertainty. Thorough research is crucial.