Tax on selling startup shares: capital gains on unlisted shares in India

The tax depends on how long the seller held the shares. A share of a private company that is not listed on a stock exchange is long term when held for more than 24 months. Anything held for 24 months or less is short term. The holding period starts on the date the shares were allotted or bought.

The gain is the sale price minus the cost of buying the shares and the costs of selling. For a founder who got shares at face value, the cost may be very small, so most of the sale price becomes gain. An angel investor who put in ₹25 lakh and sold for ₹1 crore has a gain of ₹75 lakh before expenses.

The Finance (No. 2) Act, 2024 changed capital-gains rates for transfers made on or after 23 July 2024. Long-term gains on unlisted shares are taxed at 12.5% with no indexation benefit, which means the cost is not adjusted for inflation. Before that date, the rate was 20% with indexation.

Short-term gains on unlisted shares are added to the seller's total income and taxed at the ordinary slab rate. For a person in the highest bracket, that is much more than 12.5%. Surcharge and a health and education cess are added on top, and caps on the surcharge on capital gains apply. Rates are set each year, so check the current Finance Act.

• Held more than 24 months: long term, 12.5% without indexation.
• Held 24 months or less: short term, taxed at slab rate.
• Transfers before 23 July 2024: older rules, with 20% and indexation for long term.
• Surcharge and cess are extra, depending on income.

The Income-tax Act, 2025 came into force on 1 April 2026 and replaced the 1961 Act. Commentary on it says the capital-gains rules were reorganised into new sections and schedules, and that the 24-month holding period and 12.5% long-term rate for unlisted shares were carried over. Old section numbers such as 112 and 50CA still appear in many guides, and the new Act gives them new numbers, so use the current text when filing.

Sales before April 2026 are generally taxed under the rules in force at the date of the sale.

Employees who exercise stock options face two taxable moments. At exercise, the difference between the fair market value (FMV) of the share and the exercise price is taxed as salary, a perquisite. At sale, the difference between the sale price and that FMV is a capital gain.

So the cost basis for ESOP shares is the FMV on the exercise date, not the small exercise price. The holding period for the capital gain starts at the date of exercise or allotment. A separate page on ESOP taxation explains the exercise-stage tax and the deferral available to eligible startups, so this page covers only the sale.

The tax law has a rule that can catch sellers who sell below fair value. If an unlisted share is sold for less than its fair market value as computed by the rules, the tax office can treat the fair value as the sale price for the seller's capital gain. A related rule can tax the buyer on the gap between the price paid and the fair value.

This matters in secondary sales, where a founder or early investor sells at a discount to a new investor. A valuation report from a registered valuer helps show the price was reasonable. Startups recognised by DPIIT may enjoy some relief, so check the current conditions.

A non-resident who sells shares of an Indian company is taxed in India on the gain, as the asset is in India. The long-term rate on unlisted shares for non-residents is also 12.5%, as of November 2026, with surcharge and cess. Short-term gains are taxed at higher non-resident rates.

Tax may also be withheld at source by the buyer. A double tax avoidance agreement (DTAA) between India and the investor's country can lower the rate or move the taxing right, but it needs a tax residency certificate and other papers. Foreign exchange rules under FEMA also set pricing norms for sales between residents and non-residents.

The tax rules are the same whether shares are sold to a new investor in a secondary, tendered in an acquisition or sold at an IPO through an offer for sale, except that listed shares sold on an exchange follow a separate set of rules. Sellers in an acquisition may get part of the price later, as an earn-out or a deferred amount. Tax on the deferred part generally arises when it becomes certain and receivable, so the tax can fall in different years.

Where an acquirer pays in its own shares instead of cash, the swap can still be a taxable transfer unless a special exemption for amalgamations or demergers applies. Such deals need specialist advice before signing.

A long-term capital loss can be set off against long-term gains and carried forward for eight years. A short-term loss can be set off against both long- and short-term gains. Losses must be reported in the return filed on time to be carried forward.

Some reinvestment reliefs exist for individuals, such as putting gains into a residential house under certain conditions. The rules are detailed and have limits, so confirm them before planning a sale around them.

A few habits avoid surprises. Keep records of allotment dates, share certificates or demat statements, valuation reports and payment proof. Count the 24 months from the right date. Find out whether the buyer will withhold tax. Ask an accountant to model the tax before agreeing a price.

This page gives a general explanation in simple terms. It is not tax advice, and rates and sections change, so check with a chartered accountant.

The tax office can ask for proof of every number in a capital-gains computation. A seller should keep the share purchase agreement or allotment letter, the demat statement or share certificate, bank proof of the amount paid, the sale agreement, proof of the sale price received, and any valuation report used for pricing. For ESOPs, keep the exercise notice, the employer's fair-value certificate and the payslip that shows the perquisite tax.

Founders who got shares at a very low price should keep the incorporation papers and the first allotment record, because the cost basis may be close to face value. Good records also help when a buyer asks about the holding period, since the 24 months are counted from the date of allotment, not the date of the company's founding.