5 common mistakes taxpayers make when reporting unlisted shares in income tax returns (ITR)

Unlisted shares in India are becoming increasingly popular among high-risk investors who want early access to fast-growing companies before they get listed on stock exchanges through an IPO.

These are shares of companies that are not listed on exchanges like the NSE or BSE. They usually belong to startups, privately held companies, subsidiaries of listed firms, or businesses preparing to go public.

1. Treating unlisted shares like listed shares

2. Misusing the ₹1.25 lakh LTCG exemption

3. Getting the purchase cost wrong

Calculating the correct cost of acquisition can be tricky. This becomes especially important when shares are received through ESOPs, bonuses, rights issues, inheritance, gifts, or corporate restructuring. Any mistake here can distort capital gains calculations.

4. Not reporting unlisted shares in ITR

Some investors think unlisted shares don’t need to be disclosed since they aren’t traded on exchanges. However, details of holdings, purchases, and sales must still be reported in the ITR. Not doing so can lead to scrutiny or penalties.

5. Poor record keeping

Unlisted shares require proper documentation such as purchase agreements, valuation reports, payment proofs, and transfer documents. Without these, it becomes difficult to justify transactions during tax assessment.

After understanding the common mistakes investors make, it’s also important to look at how unlisted shares are actually taxed to avoid confusion while reporting them.

Tax treatment of unlisted shares

For tax purposes, unlisted shares are treated as long-term capital assets if held for more than 24 months before selling.

If sold within 24 months, any profit is taxed as Short-Term Capital Gain (STCG) and added to your income, taxed at your slab rate.

If held for more than 24 months, the profit is treated as Long-Term Capital Gain (LTCG) and taxed at a flat 12.5%, without indexation benefits.

Unlike listed shares, Securities Transaction Tax (STT) does not apply to unlisted share transfers.