Understanding Tax on Unlisted Shares and Pre-IPO Investments

By Chirag Jain, Director of Research and Client Relations, Northbridge Wealth (ARN-41379)
Last updated: July 2026

If you hold shares in a company that isn’t listed on the NSE or BSE, a pre-IPO stake, an ESOP grant from a startup, or shares bought on the unlisted market, your tax bill hinges on one number: 24 months. Sell after holding for more than 24 months and your gain is long-term, taxed at a flat 12.5% with no indexation and no exemption threshold. Sell within 24 months and the entire gain is added to your income and taxed at your slab rate, which can run to 30% plus surcharge and cess. That is the core rule. The rest of this article covers ESOPs, what happens at IPO, gifting, and how to report it all.

A note on section references: this article uses the section numbering of the Income-tax Act, 1961, which applies to transactions up to 31 March 2026. The Income-tax Act, 2025 takes effect from 1 April 2026 and renumbers several provisions. The rates and logic are unchanged.

How capital gains on unlisted shares work

Unlisted shares are capital assets under the Income Tax Act, and any profit on their sale is taxed as a capital gain, not business income, even for frequent sellers, unless you are formally in the business of trading securities. Two things separate unlisted shares from the listed stock most investors know. There is no Securities Transaction Tax (STT) on unlisted transactions, because STT applies only to trades on a recognised exchange. And the long-term holding threshold is double.

Long-term vs short-term: the 24-month line

Hold an unlisted share for more than 24 months and the gain is long-term capital gains (LTCG), taxed at a flat 12.5%, with no indexation and no ₹1.25 lakh exemption. That exemption is specific to listed equity under Section 112A.

Hold it for 24 months or less and the gain is short-term (STCG), added to your total income and taxed at your slab rate. For an investor in the top bracket, that is the difference between paying 12.5% and paying north of 30% on the same rupee of profit.

The mechanics of the ₹1.25 lakh exemption on listed equity are covered in detail in our guide to capital gains tax on mutual funds.

Listed vs unlisted shares: a side-by-side comparison

How are unlisted ESOPs taxed?

If you hold ESOPs in an unlisted company, the kind of grant common at late-stage startups before an IPO, your tax exposure does not arrive in one event. It arrives in two, and conflating them is the single most common ESOP mistake we see.

Stage 1, at exercise: you pay tax like it’s salary. “Exercising” simply means paying the fixed price to convert your options into shares you actually own. The moment you do this, the government treats the discount you got as income, like a bonus from your employer. Say the shares are worth ₹500 each but you paid ₹100 to exercise. That ₹400 gap per share is treated as salary (technically a “perquisite”) and taxed at your normal rate. Your employer deducts this tax straight away as TDS, the same way they handle your monthly pay. The catch: you owe this tax even though you haven’t sold anything or received any cash yet.

Stage 2, at sale: capital gains tax. The trigger is the day you sell the shares. Tax is computed on sale price minus the FMV (Fair Market Value) at exercise. That FMV becomes your new cost of acquisition, not what you originally paid to exercise. The rate depends on your holding period from the exercise date: slab rate if you sell within 24 months, 12.5% if you hold beyond that.

This is why exercising early and holding, rather than exercising and selling immediately at an exit event, can shift a meaningful slice of your gain from slab-rate territory into the 12.5% bracket, provided you are comfortable carrying the illiquidity and valuation risk in the meantime.

What happens to tax once the company lists?

Here is where most confusion sets in, so it is worth stating plainly: your holding period does not reset at IPO. The clock starts on your original purchase date (or, for ESOPs, your exercise date) and keeps running once the company lists.

The practical effect: if you held the shares for 20 months before listing, that time is not wiped out. It carries forward. Once the shares are listed, the relevant threshold becomes the listed 12-month line, which you would already have crossed. So an investor who had held for 20 months pre-listing is immediately eligible for long-term treatment post-listing, not forced to start again.

What does change at listing is the rate structure applied when you sell. After the lock-in expires you are inside the listed-share regime: 12.5% LTCG with the ₹1.25 lakh exemption if you have held more than 12 months from your original acquisition date, or 20% STCG under Section 111A if you have not. Your acquisition cost stays anchored to what you originally paid, or for ESOPs the FMV at exercise. The listing event does not reset or step up your cost base.

The misconception we correct most often

Most clients who ask us about unlisted shares have already invested, through a pre-IPO deal or an ESOP grant, and just want to know how to exit without overpaying tax.

Here’s what they usually get wrong: they think that once their company lists on the stock market, the tax clock starts over from zero. It doesn’t. The time you already held the shares before listing still counts. So if you held them for two years before the IPO, you don’t start again at zero after listing, that two years carries over.

Why this matters: shares from a pre-IPO deal or ESOP are locked for six months after the company lists (you can’t sell during this time). Many people rush to sell the moment that lock-in ends, assuming they’d be taxed at the high short-term rate anyway. But because their earlier holding period counts, most of them have already crossed into the lower 12.5% long-term rate, they just don’t realise it, and end up either selling in a needless panic or overpaying.

The second thing people miss: they treat exercising ESOPs as tax-free because no cash changed hands. But tax is due the moment you exercise, long before you sell or see any money.

Unlisted shares are one of several structures we help families hold tax-efficiently. Our overview of alternative investments covers how these fit alongside PMS, AIF, and other vehicles.

Gifting, inheriting, and transferring unlisted shares

Gifts to specified relatives, as defined under the Income Tax Act, are exempt from tax for the recipient. Gifts to anyone outside that list are taxable to the recipient as income from other sources if the fair market value exceeds ₹50,000.

When gifted or inherited shares are eventually sold, the cost of acquisition carries over from the original owner, and the original owner’s purchase date counts toward your holding period. You may therefore qualify for LTCG sooner than you would expect from your own date of receipt.

One trap on price: if your actual sale price comes in below the FMV computed under Rule 11UA, Section 50CA deems the FMV, not your lower sale price, as the consideration for calculating your gain.

How to report unlisted shares in your ITR

Unlisted-share holdings and transactions require ITR-2 (if you have no business income) or ITR-3 (if you also have business or professional income). The simpler ITR-1 and ITR-4 forms do not accommodate them.

Report short-term gains under Point A5 of Schedule CG, and long-term gains under Point B9. Declare your opening balance, purchases, sales, and closing balance of securities under Point (j) of Part A-General, even in a year with no transactions. If total unlisted holdings exceed ₹5 lakh in value, disclose them under Schedule AL (Assets and Liabilities).

Keep contract notes, demat statements, and bank records for at least 7 years. Private transactions carry a higher documentation burden than exchange-traded ones, because there is no automatic exchange-generated paper trail.

Frequently asked questions

Do I have to disclose unlisted shares in my ITR even if I haven’t sold them?
Yes. Holdings, whether bought, sold, or simply held, must be declared under the securities-holding disclosure in Part A-General of ITR-2 or ITR-3. If their value crosses ₹5 lakh they also need to be listed under Schedule AL.

Which ITR form should I use?
ITR-2 if your only income sources besides salary or other income are capital gains. ITR-3 if you also have business or professional income. Unlisted-share gains go under Schedule CG, short-term under point A5, long-term under point B9.

Is TDS deducted when I sell unlisted shares?
Not on a straightforward resident-to-resident OTC sale. TDS does apply in specific cases: a 20% deduction on LTCG paid to NRI sellers under Section 195, and the employer-side TDS on ESOP perquisites under Section 192.

Can I set off a loss on unlisted shares?
A long-term capital loss can be set off only against long-term capital gains. A short-term capital loss can be set off against both short-term and long-term gains. Either way, unused losses carry forward for up to 8 assessment years, provided you file on time.

What if I sell unlisted shares below fair market value?
Section 50CA applies: if your sale price is lower than the FMV computed under Rule 11UA, the FMV, not your sale price, is treated as the full value of consideration for calculating your gain.

Sources: Income Tax Act, 1961 (Sections 2(42A), 45, 48, 111A, 112, 112A); Income Tax Department; SEBI.

Disclaimer: Northbridge Wealth is an AMFI-registered Mutual Fund Distributor (ARN-41379). This article is for general educational purposes only and does not constitute tax, legal, or investment advice. Tax rules are subject to change and their application depends on individual circumstances. Please consult a qualified tax professional before acting on any information here.