💡 Tax-Efficient Structures for Unlisted Investments in India

Summary: Investing in unlisted shares can yield 20–30% IRRs, but capital-gains taxes (up to 20% LTCG, slab-rate STCG) can erode returns. This guide covers five key tax-efficient structures—Hindu Undivided Family (HUF), private trusts, NRI SPVs under DTAA, Section 54F reinvestment, and offshore vehicles—to help you legally minimize your Indian unlisted-share tax liability. ¹²

Table of Contents

• Taxation Overview: Unlisted Shares
• 1. Hindu Undivided Family (HUF)
• 2. Private Discretionary Trusts
• 3. NRI SPVs & DTAA Benefits
• 4. Section 54F Reinvestment
• 5. Offshore Holding Companies
• Conclusion
• References

Taxation Overview: Unlisted Shares

Unlisted shares held ≤24 months attract Short-Term Capital Gains (STCG) taxed at slab rates (up to 42.7% including surcharge & cess).³ Held >24 months, they qualify as Long-Term Capital Gains (LTCG) taxed at 12.5% without indexation (up from 20% with indexation pre-July 2024).⁴

1. Hindu Undivided Family (HUF)

An HUF is a separate tax entity under the Income-Tax Act, with its own PAN and ITR (ITR-2 or ITR-3).⁵ Unlisted shares held by the HUF enjoy LTCG concession at 12.5% and can use ₹1.25 lakh LTCG exemption on listed equities ⁶, effectively reducing overall tax burden for family portfolios.

Key points:⁷

• Separate PAN & ITR—no impact on individual slab rates.
• Suitable for multi-generation wealth planning.
• Requires HUF deed and Karta management.

2. Private Discretionary Trusts

Trusts can hold unlisted-share portfolios under a trustee arrangement, distributing income to beneficiaries in lower tax brackets. Distributions are taxed in the hands of beneficiaries, not the trust corpus.⁸

Benefits include:

• Income splitting among family members.
• Asset protection and succession planning.
• No estate duty; smoother inter-generational transfer.

3. NRI SPVs & DTAA Benefits

NRIs often use Mauritius or UAE-based SPVs to invest in Indian unlisted shares to leverage DTAA tax rates (10% LTCG) and avoid dividend distribution tax. India’s DTAA with Mauritius/UAE reduces withholding to as low as 10%.⁹¹⁰

Key steps:¹¹

1. Incorporate SPV in DTAA jurisdiction.
2. Obtain tax residency certificate (TRC).
3. Invest via PIS route; file Form 15CB/15CA.

4. Section 54F Reinvestment

Section 54F allows exemption of LTCG from sale of any asset (including unlisted shares) if net consideration is reinvested in residential property within timelines.¹²

Conditions:

• Entire net sale proceeds invested in new house within 1 year before or 2 years after sale, or construction within 3 years.
• Exemption capped to proportion reinvested; balance taxed at 12.5%.⁰

5. Offshore Holding Companies

Institutional vehicles—Mauritius, Singapore, Cayman SPVs—can host unlisted-share portfolios. Careful structuring averts GAAR scrutiny and aligns with FATCA/CRS compliance. ¹³

Common structures:¹⁴

• Corporate feeder funds with Category I AIF licenses.
• Private trusts operated out of DIFC or Lichtenstein for EoI.

Conclusion

By leveraging HUFs, discretionary trusts, NRI SPVs under DTAA, Section 54F, and offshore holding companies, unlisted-share investors in India can substantially reduce their tax outgo. Consult legal and tax advisors to tailor the optimal mix for your portfolio—InvestoEdge’s advisory team can guide you through each setup.

References

1. Angel One – Taxation on Unlisted Shares
2. Wint Wealth – Taxation of Private Equity Investment
3. Reuters – India Budget: LTCG/STCG Tax Changes
4. Angel One – LTCG Rate Change on Unlisted Shares
5. Shoonya – HUF Income Tax Guide
6. Groww – HUF vs Individual Demat Accounts
7. Income Tax Dept – ITR for HUF
8. ClearTax – Section 54F Exemption
9. ICICI Bank – DTAA Benefits for NRIs
10. RBI – NBFC Lending Guidelines (LAS)
11. GoINRI – Section 54 & 54F for NRIs
12. ClearTax – Section 54F Guide
13. Akin Gump – Structuring Funds for Investment in India
14. PwC – Corporate Income Determination India