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The income-tax (IT) department said that income from transfer of unlisted shares will be categorized as capital gains, irrespective of the holding period. The clarification is a continuation of the tax department’s efforts to reduce litigation and other disputes and bring in a uniform approach to classification of income.
The current announcement is positive for investors investing in unlisted shares as assesses can claim the income as capital gain instead of business income. Capital Gain on sale of unlisted securities which qualify as short term is taxable at 15%. Capital gain on sale of unlisted securities attract a long term capital gain tax at the rate of 20% with indexation benefit. Business income, on the other hand, is taxable on slab rate which can be as high as 30%, that too without indexation.
In February this year, the tax department had issued a similar clarification regarding classification of income arising from transfer of listed shares wherein it had said that an assessee could classify income from a transaction as capital gains after 12 months.
However, the tax department has listed three exceptions wherein this clarification will not be applicable. It will not apply in cases where the genuineness of transactions in unlisted shares is questionable, where a question of lifting the corporate veil arises and where there is transfer of control and management, the CBDT said in a notification.