Unlisted Shares for NRIs: Complete Investment Guide

Unlisted shares seem to be the investment avenue that many Non-Resident Indians are exploring to invest in the success story of India before its IPO. It is indeed an opportunity but for NRIs, the process, documentation, and taxation aspect is quite different than that for a domestic resident investor. Here’s how the process really works.

Can NRIs legally invest, and through which route?

NRIs can invest in unlisted stocks in India, but the transaction should be in line with the provisions of the FEMA act because it is a situation where a non-resident acquires the securities of an Indian business. Depending on the sector the investee company operates in, the applicable entry route, sectoral caps, and other FEMA conditions need to be checked before the transaction, since certain sectors, like defense and telecommunications, are subject to specific limits or approval requirements. This implies that either the company making the transaction or the intermediary handling the transaction must verify the sector-specific route and conditions applicable to that investment. This is especially important if the transaction is between a resident and a non-resident.

NRE vs NRO: the account decides your repatriation rights

The bank account from which the payment for acquisition is made holds much more importance than what many NRI investors make their first-time purchases would think, though the account used is not by itself the sole determinant of repatriation status. Whether an unlisted share investment is repatriable or non-repatriable depends on whether it is made on a repatriation or non-repatriation basis under the FEMA (Non-Debt Instruments) Regulations; funding the acquisition through an NRE (Non-Resident External) account does not, by itself, automatically make the investment repatriable, and the underlying investment and subsequent sale must still comply with the applicable FEMA conditions and pricing guidelines for repatriation to apply. Acquisition funded through the NRO (Non-Resident Ordinary) account is generally treated as non-repatriable, with sale proceeds remaining in India for domestic use, though a remittance of such proceeds abroad, up to the limits prescribed by the RBI, may still be permitted subject to conditions. It happens quite often that NRIs fail to understand these nuances when investing in unlisted stocks.

How the tax treatment works

Unlike listed equity, unlisted shares are taxable differently under the Income Tax Act of India, and this became even more true because of the tax law amendments applicable since 23rd July 2024. Gains earned from the sale of unlisted shares held for over 24 months are subject to long-term capital gains tax of 12.5% for transfers on or after 23rd July 2024, but not indexed to account for the inflation factor. Short-term capital gains earned from unlisted shares are generally taxed at the applicable income slab rate, subject to the specific provisions governing the nature of the gain. Since the shareholder is a non-resident, TDS will be deducted at source according to the provisions of Section 195, and the applicable rate can vary depending on the nature of the income, the surcharge and cess applicable to the investor's income level, and any relief available under the relevant DTAA, and this rate is often higher than the final 12.5% LTCG liability. The discrepancy between the amount of TDS deducted and payable income tax is typical and will be reflected only if the person files his Indian income tax return.

Practical steps that reduce friction

There are a few things that make an NRI transaction run smoothly as compared to those which do not. First, getting the Lower Deduction Certificate before the transaction, when it is known that the tax liability will be significantly lower than the TDS rate, saves a significant amount of capital from being deposited with the tax department until the refund period comes around; this was earlier obtained via Form 13 under Section 197 of the Income-tax Act, 1961, and from 1st April 2026, the corresponding provision is Form 128 under Section 395(1)/395(3) of the Income-tax Act, 2025. The maintenance of proper documentation records such as the original purchase contract notes and transfer deed is more important in case of unlisted shares than for listed shares, as there is no trading record for reference in case of future disputes, and where the transaction requires an FC-TRS filing under FEMA, that filing should be completed and retained as well. It is also wise to check the status of the DTAA between India and the country of residence before making the transaction, since the availability of foreign tax credit against Indian TDS depends on it. Finally, as unlisted shares have no guaranteed exit, the NRIs should view the final sale through whatever route – IPO, Buyback or private secondary transaction – as the riskiest phase of the entire investment process.