Tax Implications for NRIs Selling Unlisted Shares

In the case of the NRI disposing of his equity in an unlisted Indian company, whether this is pre-IPO stock, start-up equity, or ownership of family firm, it is not the tax rate that becomes difficult but the whole compliance process surrounding it, which does not exist for residents.

The Rate Itself Is Straightforward

NRIs are subject to the same capital gains tax rates as the sellers who are residents on unlisted stocks. The holding period of more than 24 months will make the capital gain long term in nature, which will be taxed at a fixed rate of 12.5% under Section 112 of the Income Tax Act, with no benefit of indexation - indexation benefit has been stripped from this category of assets for any sale post 23rd July 2024, and both Budget 2025 and Budget 2026 failed to restore it. If the gain arises within24 months, then the gain will be short term and will get added to the income slab for tax purposes. It should be noted that the rebate available under Section 87A cannot be availed by NRIs on LTCG taxable under Section 112, irrespective of the level of their income from India. The final tax outgo is also not limited to the base rate alone, as applicable surcharge, depending on the NRI's total income slab, and a 4% Health and EducationCessget added on top of the tax computed, which meaningfully raises the effective rate.

A Relief Worth Knowing:theForeign Currency Computation Benefit

For NRIs who originallyacquiredtheir shares or debentures in an Indian company using foreign currency, the first proviso to Section 48 offers a mandatory computation benefit. Instead of computing the gain purely in rupee terms, the cost of acquisition, expenses on transfer, and sale consideration are all reconverted into the original foreign currency (typically at the average of the buying and selling telegraphic transfer rates), and the gain is worked out in that foreign currency before being converted back to rupees for tax purposes. This shields the NRI from a rupee depreciation being taxed as an artificial gain, and can, in some cases, mean little to no taxable gain at all even where the rupee-denominated sale proceeds look higher than the original investment.

Cost of Acquisition for Gifted, Bonus, Rights, and ESOP Shares

Not every NRI seller has a straightforward purchase-and-sale history, and the manner in which the shares originally came into the NRI's hands changes how the cost of acquisition is determined.For shares received as a gift, the cost is taken as the cost to thepreviousowner who actuallypaid forthem, and the holding period also carries over from thatpreviousowner. Bonus shares are treated asacquiredatnilcost, with the holding period reckoned from the date of allotment of the bonus shares themselves.Rightsshares, on the other hand, are costed at the amount actually paid to subscribe to them, with the holding period again running from the date of allotment. Sharesacquiredthrough an ESOP carry a cost of acquisition equal to thefair market valueconsidered for perquisite taxation at the time of exercise, since that amount would already have been taxed as salary income. Getting this starting point right matters, since an error hereflows throughdirectly into the capital gains computed under Section 48 and Section 50CA.

Where It Gets More Involved: the FMV Floor

Since there is no market price for unlisted shares, Section 50CA mandates that the fair market value, determined as per Rule 11UA (read with Rule 11UAA for the purpose of Section 50CA), is considered the deemed sale consideration instead of the actual sale consideration if the latter is lower than the former. When an NRI disposes of his shares at a price lower than this FMV, which is a typical case when the transaction takes place within the family or through a private deal, the capital gains tax will be calculated based on the FMV and not on the actual price realized. It is worth noting that certain notified transactions, such as those undertakenpursuant toapproved businessreorganisationor resolution plans, are excluded from Section 50CA, and FMV substitution does not apply to them.

TDS: The Real Point of Friction

The burden of compliance that truly sets apart from an NRI seller from his domestic counterpart is provided in Section 195. This section requires the resident buyer to deduct TDS on the sum chargeable to tax, which, strictly speaking, isthe capital gainsportionof the sale consideration and not the entire sale value. In practice, however, buyers are often reluctant to compute the gain themselves and tend to deduct TDS on the grosssaleconsideration unless the NRI seller obtains a lower ornildeduction certificate under Section 197. Such is an extremely important provision when we take into account the fact that the consequence of this could mean that the NRI will be stuck with too much money deducted from their income and only after filing the next year's returns can they claim refunds on this amount.

 A Tax Residency Certificate along with Form 10F from the NRI seller's country of residence willfacilitatethe use of Double Taxation Avoidance Agreements and hence, help the NRI pay minimal taxes or avoid the same completely. Without a valid TRC and Form 10F, DTAA benefitsgenerally cannotbe applied, and tax is usually deducted under the domestic provisions of the Income Tax Act instead.

Filing and Repatriation

NRIs must file their Indian return form, either ITR-2 if there is no business income, or ITR-3 if there is one, to settle the TDS deduction against the total tax liability and to claim a refund. Similarly, if the NRIs wish to claim the benefits of Double Taxation Avoidance Agreement (DTAA) which was not captured during the TDS stage, they will have to file their Indian return form.

 The sale proceeds are subject to repatriation based on the mode in which the investment was made, i.e. if the investment was done using NRE funds, then the proceeds may be repatriated without any limit, but if the proceeds are from an investment using NRO funds, then repatriation is limited to USD 1 million per year with certification through Form 15CA/15CB. In either case, repatriationremainssubject to FEMA and RBI regulations, and the NRI will need to route the transaction through anAuthorisedDealer bank, which will independently call for its own set of documentation before remitting the funds abroad.