For NRIs, what is the tax treatment on pre-IPO share sales?

I live in Australia and I own shares in a company which got recently listed. Being a friend’s company, I had invested in it about one and half year back when it was not listed. When I sell these shares now, would it be considered as short-term gains or long-term gains?
- Name withheld on request

Capital gains are triggered by the ‘transfer of a capital asset’. In other words, it is the capital asset transferred that results in such gains.

Since the shares held by you are listed at the time of sale, the relevant holding period will be that which is applicable to listed shares, rather than that applicable to unlisted shares.

For listed shares, a holding period of more than 12 months qualifies the transaction to be long-term in nature and thus, capital gains arising from transfer of your shares would be long-term capital gains.

Q2

I have been residing in the UAE for the past 20 years. During COVID, I invested in an unlisted company in India for the first time, expecting it to be listed in the near future. However, the listing is not going to take place for another 2-3 years. I have now found a buyer in India for these shares, but the buyer is insisting on a no-dues certificate from my AO for the transfer. Is it mandatory to obtain this certificate?
-Name withheld on request

Indian Income Tax law includes a provision aimed at safeguarding the revenue’s interests. It prevents taxpayers from transferring assets in a manner that could affect the recovery of existing or potential tax dues arising from ongoing proceedings.

Under this provision, any transfer of assets—including shares of an Indian company—made while tax proceedings are pending or tax arrears exist can be treated as void unless either:

(a) the transfer is carried out with prior permission of the Assessing Officer (AO), or

(b) it is made for fair value and without knowledge of any pending proceedings or outstanding tax demands.

In your case, the buyer’s request for an AO certificate is intended to ensure that the transaction will not later be treated as void under this provision.

However, if there are no pending tax proceedings or outstanding tax demands against you, and the sale is conducted at fair market value, obtaining such a certificate is not mandatory. Instead, buyers commonly accept a Chartered Accountant’s certificate confirming the absence of pending proceedings or tax dues, supported by screenshots from the Income Tax and TDS portals.

Harshal Bhuta is partner at P. R. Bhuta & Co. CAs