Capital Gains on Unlisted Shares AY 2026-27: Section 112 Rates, Cost Rules, and Why the Holding Period Is Everything

Unlisted shares — equity in private companies, startups, closely held firms — are increasingly common in the portfolios of founders, employees with ESOPs, and angel investors. But when it comes time to sell, the tax treatment is fundamentally different from listed equity. There is no STT benefit, no Section 111A or 112A flat rate, and the rules around cost of acquisition can be counter-intuitive. This case study breaks down exactly how capital gains on unlisted shares are computed for AY 2026-27.

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Unlisted vs. Listed: The Core Distinction

When you sell shares of a company listed on a recognised Indian stock exchange (BSE, NSE), you pay Securities Transaction Tax (STT) at the time of sale. That STT payment unlocks preferential capital gains rates under Sections 111A and 112A:

• Section 111A: Short-term capital gains on listed equity — taxed at 20% (revised from 15% for transactions on or after 23 July 2024)


• Section 112A: Long-term capital gains on listed equity exceeding ₹1,25,000 — taxed at 12.5% (without indexation, for transactions on or after 23 July 2024)

Unlisted shares receive none of these benefits. There is no STT, so Sections 111A and 112A do not apply. The governing section for long-term capital gains on unlisted shares is Section 112 of the ITA 1961.

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The Holding Period: 24 Months Is the Threshold

For unlisted shares, the distinction between short-term and long-term capital assets depends on a 24-month holding period (as against 12 months for listed shares).

• Held ≤ 24 months: Short-term capital asset → STCG taxed at your applicable income tax slab rate
• Held > 24 months: Long-term capital asset → LTCG taxed under Section 112

This distinction has a massive impact on the effective tax rate. A taxpayer in the 30% slab who sells unlisted shares held for 2 years and 1 month pays 12.5% on the gain. If they sell even one day before crossing 24 months, they pay 30%.

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Section 112 Rates After Budget 2024 (Effective 23 July 2024)

Budget 2024 made a significant structural change to Section 112, effective for all transfer transactions on or after 23 July 2024:

For transfers on or after 23 July 2024:

• LTCG on unlisted shares: 12.5% without indexation


• The earlier option of 20% with indexation was removed for transfers after this date

For transfers before 23 July 2024 (if any pending assessments or retrospective matters):

• The previous regime applied: taxpayer could choose between 20% with indexation or 10% without indexation


• For FY 2024-25 transactions before 23 July 2024, the old rates apply

For AY 2026-27 (FY 2025-26), all transactions took place after 23 July 2024 — so the rate is uniformly 12.5% without indexation for long-term gains on unlisted shares.

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Computing the Capital Gain: Step by Step

Sale price (Full Value of Consideration) = ₹50,00,000

Less: Cost of Acquisition = ₹5,00,000 (original investment)

Less: Cost of Improvement = nil

Long-Term Capital Gain = ₹45,00,000

Tax under Section 112 = 12.5% × ₹45,00,000 = ₹5,62,500

Plus: Surcharge (if applicable) — on the base LTCG tax, surcharge at applicable rate (10% if total income ₹50L-₹1Cr, 15% if ₹1Cr-₹2Cr, etc.)

Plus: 4% Health and Education Cess on tax + surcharge

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Cost of Acquisition Rules: The Three Key Scenarios

Scenario 1: You Purchased the Shares Directly

Cost of acquisition = price you actually paid, including brokerage and related charges. Retain the original share purchase agreement or subscription form.

Scenario 2: You Received Shares Via ESOP (Employee Stock Option Plan)

For ESOPs in an unlisted company, the tax treatment has two components:

• At exercise: The difference between Fair Market Value (FMV) on exercise date and the exercise price is perquisite income taxed as salary under Section 17(2). This is the employer's withholding obligation. The FMV for unlisted company shares at exercise is determined under Rule 3(9) — typically via a merchant banker's valuation.
• At sale: The cost of acquisition for capital gains is the FMV on the date of exercise (not the exercise price). This is because you already paid tax on the FMV-exercise price differential as salary. Capital gain = Sale price minus FMV at exercise.

This is a critical distinction — many ESOP holders mistakenly use the exercise price as cost, resulting in over-computation of capital gains.

Scenario 3: Inherited Shares

If you inherited shares from a deceased person, Section 49(1) applies. The cost of acquisition in your hands is:

• The cost to the previous owner (if the shares were acquired before 1 April 2001, the FMV as on 1 April 2001 may be used as cost)


• Or, if you elect: FMV as on 1 April 2001 for shares held since before that date

Holding period for inherited shares: includes the period the deceased held the shares. So if the deceased held them for 18 months and you inherit and sell after 7 more months (total 25 months), the asset qualifies as long-term.

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Valuation of Unlisted Shares: Rule 11UA

A recurring challenge with unlisted shares is determining FMV — particularly relevant for:

• Gifted shares (Section 56(2)(x) — if received below FMV, the shortfall is taxable as income in recipient's hands)


• Inherited shares pre-2001


• ESOP valuation at exercise

Rule 11UA of the Income Tax Rules, 1962 prescribes the FMV methodology for unlisted equity:

FMV = (A + B – L) × PV / PE

Where:

• A = Book value of assets


• B = Fair market value of unencumbered jewellery, artistic works, shares, and securities


• L = Book value of liabilities (excluding share capital, reserves, surplus, and provisions for dividends/taxes)


• PV = Paid-up value of shares held by assessee


• PE = Total paid-up equity share capital of the company

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What Section 80-IAC Does NOT Do for You as a Shareholder

A common misconception among startup equity holders: if the company itself received approval under Section 80-IAC (which gives the eligible start-up company a 3-year tax holiday on its own profits), that does not translate into a capital gains exemption for the shareholder when they sell shares.

Section 80-IAC is a benefit for the company on its taxable profits, not for the investor or employee on capital gains from share sale.

If you are a founder or angel investor hoping for a capital gains exemption on startup equity, the current law does not provide one. You pay Section 112 LTCG at 12.5% on gains from unlisted equity.

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Frequently Asked Questions

Q1. I have unlisted shares in a foreign company. Does Section 112 apply?

If you are a resident Indian and you sell shares in a foreign unlisted company, the capital gains are taxable in India as your global income. Section 112 applies. The holding period is still 24 months for long-term classification.

Q2. Can I set off losses from unlisted share sales against gains from listed equity?

Short-term capital losses can be set off against both short-term and long-term capital gains. Long-term capital losses (from unlisted shares) can be set off only against long-term capital gains — they cannot be set off against short-term gains. Unabsorbed capital losses can be carried forward for 8 assessment years.

Q3. My company converted from a partnership to a private limited company. Are the shares issued to me on conversion at cost?

Conversion of a partnership to a company under Sections 47(xii)-(xiii) of ITA 1961 is a notified transfer that is exempt at the time of conversion. The cost of the shares received will be the net book value of the corresponding partnership interest. On eventual sale of those shares, the holding period starts from the date of conversion.

Q4. I have ESOP shares in an Indian startup that is now being acquired by a foreign company via a share swap. Is this taxable?

A share swap where you receive shares of a foreign acquirer in exchange for your Indian startup shares is generally a taxable transfer in India. The capital gain is computed on the FMV of shares received (in INR). Certain international restructuring exemptions exist but are narrow.

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Final Word

Unlisted share sales are common — and commonly misunderstood. The key framework is: 24-month holding period determines LTCG vs. STCG, Section 112 at 12.5% (without indexation) governs LTCG for post-July 2024 transactions, and your cost of acquisition depends critically on how you acquired the shares.

Harun Raaj & Associates handles complex capital gains situations for founders, NRIs, and ESOP holders. Visit harunraaj.com for a consultation.

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