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Hold shares of US-listed companies? Know income tax rules on gains

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The covid-19 pandemic opened the doors for many first-time investors to try their hands at the stock markets. Apart from using traditional tools like fixed deposit (FD), recurring deposit (RD), PPF, among others to amass wealth, investors started buying stocks of companies to build wealth. But do you know all companies are not listed on the stock exchange, i.e. National Stock Exchange (NSE) or Bombay Stock Exchange (BSE).

Listed and Unlisted shares

A listed company is a stock exchange-listed company wherein the shares are openly tradable. When you invest in the stock of a company it means you own a share in the company that issued the stock.

An unlisted company is a company that is not listed on the stock market. Unlisted stocks are not listed on BSE or NSE. These stocks are traded over-the-counter (OTC) market.

The tax implication of these unlisted companies is also different from other listed companies. Archit Gupta, CEO, Clear (formerly cleartax), a fintech SaaS company that offers ITR filing assistance, explains that the Income tax act differentiates between tax treatment of listed and unlisted shares.

“So if you own shares of an American company which is listed there but not in India then it will be considered not listed in India. They may be considered unlisted for the purpose of taxation in India.” added Gupta.

The applicability of capital gain tax would depend on whether the unlisted stocks are long term or short term.

Gupta of Clear explained that for unlisted shares, the short term capital gains time period will be considered as 24 months and long term capital gains will apply only if the said unlisted shares are sold after 24 months.

“Indexation benefits for long term capital gains taxation will be allowed, this will increase the asset’s cost to give the effect of inflation,” added Gupta.

Long-term capital gains on the sale of listed equity shares are fully exempt up to 1 lakh every year and beyond that the same are taxed at flat rate of 10% without benefit of indexation. 

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