Tax on capital gains for NRI on unlisted company shares

Dear Sir,

Hope you are doing well !!

Taxability in hands of companies –Buyback of shares by unlisted companies is taxable under Section 115QA of the Income Tax Act at a flat rate of 20% on the ‘distributed income’. Distributed income means the consideration paid by the company on buyback of shares as reduced by the amount which was received by the company for the issuance of such shares.

Taxability in hands of shareholders – Receipts in the hands of shareholder is exempt under Section 10(34A) of Income Tax Act.

In your case, there would be no tax liability.

Hello,

Consideration received by the shareholder of an unlisted company on buyback is exempt from tax for the shareholder while the company is liable for tax on the distributed income.

I hope that this answer satisfies your requirements.

Regards,

CA Hunny Badlani

Hi,

Since the period of holding from orginal purchase date is less than 2 years, it will be considered short term capital gain.

Short term capital gain is chargeable to tax at slab rate (genrally 30%).

Short term capital gain cant be saved unless you have short term capital losses.

Hello Sir,

Here are the replies to your questions:

1. As per the information provided by you that you have invested in a startup, so it means that you have invested in unlisted shares. And as per the provisions of income tax act, in case unlisted shares 

- Capital Gain will be long term only when it will be held for a period of more than 24 months.

so, in your case as the shares are held by you for a period more than 24 months then the capital gain arises on its sale will be the Long Term Capital Gain.

2. In case of Long Term Capital Gain of Unlisted Shares- Income Tax will be 20% after giving the impact of indexation. so accordingly in your case the applicable tax rate would be 20%.

3. In case of any of the reason your investment doesn't qualify for the condition of Long Term Capital Gain as mentioned in point no -1 then in that case gain arises on that will be treated as short term capital gain.

In case of short term capital gain of unlisted securities- The short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab.

Maximum Slab Rate is 30%.

Thanks and Regards

Divya Chugh 

Hello Sir. Answers to your queries are as under:

Answer to Query 1- Buyback:

If a company buys back its shares, the company itself has to pay tax on it under section 115QA of the Income Tax Act, 1961 and consequently, the consideration received by the shareholder is exempt from tax under section 10(34A) of the Act.

Accordingly, there will be no tax liability in your hands on consideration received on buyback.

Answer to Query 2 - Direct sale to another institutional investor:

An equity share of an unlisted company shall be considered to be a "long term capital asset" if it is held for a period of more than 24 months. In the present case, since it is more than 24 months from the date of your original investments, the shares would be considered as long term capital assets and the resulting capital gains would be "long term capital gain".

Further, there is no effect of dilution on the period of holding of the asset.

In such case, assuming that you are a non-resident for the purpose of Income Tax Act, you would be liable to pay tax at the rate of 10% (plus surcharge and cess, as applicable) under section 112(1)(c) of the Act (indexation and forex fluctuation benefit would not be available).

Hope to have resolved your queries.

Best regards,

CA Yogesh Malpani

If it's buyback you won't have to pay any tax it would be tax free and company will pay 20% tax on same.

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Thank you

The shares purchased in 2017 would be long term and diluted shares issued to you in 2018 would be short term.

For short term there is no option to save tax.

LTCG for original investments.

STCG for diluted shares.