Income from unlisted share sale to be taxed as capital gain

Income from sale of unlisted shares would be treated as capital gains and taxed at a lower rate than business income to have a uniform approach and avoid litigations, the Income Tax department has said.
"It has been decided that the income arising from transfer of unlisted shares would be considered under the head 'capital gain' irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach," CBDT said in a notification.
Central Board of Direct Taxes said that for determining the tax treatment of income arising from transfer of unlisted shares for which no formal market exists for trading, a need was felt to have a consistent view in assessments pertaining to such income.

Capital gain on sale of unlisted securities attract a long term capital gain tax at the rate of 20 per cent with indexation benefit. Business income, on the other hand, is taxable on slab rate which can be as high as 30 per cent, that too without indexation.
Capital Gain on sale of unlisted securities which qualify as short term is taxable at 15 per cent.
According to experts, assessees will clearly benefit by claiming the income as capital gain instead of business income.

"Such regular and timely clarification by CBDT on disputed issues is in line with its aim to bring uniformity in AO's approach and certainty of tax liability for the assessee, which furthers the confidence of investors in India's tax regime," said Rakesh Nangia, Managing Partner Rakesh Nangia.

Till now, income arising from the transfer of long-term
capital assets such as stocks is exempted from tax if the sale took place on or after October 1, 2004. STT applies to listed stocks.
The government, he said, will take inputs from everybody and notify a set of exemptions. "So, it is an enabling power we have taken. We will be able to exempt any class of investors who are genuine investors so that they are not harassed. It will not apply to them. They will get the benefit of long-term capital gains if it is genuine investment," Adhia said.

The secretary maintained that FDI coming through automatic or FIPB route will not be impacted.
"We will notify the exemptions once the Finance Bill is passed and we will have public consultation with all stakeholders," he added.