How an NRI Is Taxed When Exiting Unlisted Indian Shares: Startup Equity, Pre-IPO, Secondary Sale and Buyback

You hold equity in an Indian startup. Maybe you were employee number nine and your ESOPs finally vested, maybe you angel-invested Rs 25,00,000 in a friend's company four years ago, maybe you inherited founder shares, or maybe a secondary buyer has offered to take your stake off your hands at a number that would have seemed impossible at incorporation. The offer lands in your inbox in London or Dubai or San Jose, and the first question is the one nobody at the company can answer cleanly: what does India take, and how, and who is supposed to withhold it before the money reaches you.

The 30-second answer: An NRI selling unlisted Indian shares pays capital gains tax, not the listed-share regime. Hold for more than 24 months and the gain is long-term, taxed at a flat 12.5% under Section 112(1)(c) with no indexation for transfers on or after 23 July 2024. Hold for 24 months or less and it is short-term, taxed at your slab rate up to 30%. Surcharge and 4% cess sit on top, and there is no Rs 1.25 lakh exemption (that is Section 112A, listed shares only). The buyer must deduct TDS under Section 195 on the gain; apply for a lower-deduction certificate in Form 13 to avoid over-withholding. A buyback paid before 1 April 2026 is taxed as a deemed dividend on the full amount; from 1 April 2026 it reverts to capital gains.

If you are reconciling one of these exits on your return, start with the ITR filing guide for NRIs, AY 2026-27, which shows where capital gains and the Section 195 credit go on the form. This guide assumes you know in outline what a Tax Residency Certificate and Form 10F are and how Section 195 works; if not, read the DTAA relief guide and the TDS for NRIs guide first. What follows is the part that actually decides how much you keep: the rate that applies to unlisted shares (which is not the rate most people assume), the TDS your buyer is legally required to withhold, the buyback mechanic that flips depending on the date, and the fair-value and FEMA traps that catch founders and angels who priced the deal on commercial terms and forgot the law has its own opinion about the price.

Why unlisted shares are a different animal from your Zerodha portfolio

Most NRIs who hold Indian equity hold it through a demat account, buy and sell listed shares on the NSE or BSE, and pay Securities Transaction Tax on each trade. That world is governed by Section 111A for short-term gains (20% from 23 July 2024) and Section 112A for long-term gains (12.5% above a Rs 1.25 lakh annual exemption, holding period 12 months). Almost everything written about NRI capital gains describes that regime, and almost none of it applies to you.

Unlisted shares, startup equity, pre-IPO stock, the shares a private company issues to founders, employees and angels, are taxed under a completely separate set of rules. There is no STT, so neither Section 111A nor Section 112A is available. The exemption of Rs 1.25 lakh does not exist for you. The 12-month holding period does not exist for you. Instead:

• The holding period to qualify as long-term is more than 24 months, double the listed-share period.
• The long-term rate is 12.5% under Section 112(1)(c) with no indexation, for transfers on or after 23 July 2024.
• The short-term gain (24 months or less) is taxed at your applicable slab rate, which for an NRI with a large one-off gain typically means the 30% slab, not a flat 20%.

This is the single most common misunderstanding I see. A founder reads that long-term equity is taxed at 12.5%, assumes the first Rs 1.25 lakh is exempt and that 12 months is enough, and plans the exit accordingly. Both assumptions are wrong for unlisted stock. The clock is 24 months, and every rupee of the gain is taxed from the first.

The long-term rate: 12.5% flat, no indexation, after 23 July 2024

For an NRI, Section 112(1)(c)(iii) has always been the charging section for long-term gains on unlisted securities and shares of a closely held company. What changed on 23 July 2024 was the rate and the removal of indexation.

Before that date, the position for a non-resident on unlisted shares was a flat 10% without indexation and without the benefit of foreign-currency conversion under the first proviso to Section 48. After 23 July 2024, the rate moved to 12.5% without indexation. So an NRI's long-term gain on unlisted shares is now a clean 12.5% of (sale consideration minus cost of acquisition), with surcharge and 4% health and education cess on top.

Two points that genuinely matter and that people miss:

Indexation is gone, but it was never fully yours anyway. Resident sellers of unlisted shares lost indexation on 23 July 2024 too, but for them it was a real loss. For an NRI the picture was always more restricted, because the first and second provisos to Section 48 already limited how cost could be inflated. The practical effect today is the same for everyone: you compute the gain in nominal rupee terms, full stop.

Surcharge on capital gains on unlisted shares is not capped at 15%. This is a costly trap. For listed shares under 111A and 112A, surcharge is capped at 15% however large the gain. That cap does not extend to gains on unlisted shares under Section 112. So a large unlisted-share gain can attract surcharge at the higher slabs, up to 25% (the 37% rate having been removed under the regime that applies to most taxpayers). On a multi-crore secondary sale, the difference between a 15% and a 25% surcharge on the tax is real money. Model your effective rate, do not assume 12.5% all-in.

The short-term rate: slab, and that usually means 30%

If you held the shares for 24 months or less, the gain is short-term, and there is no special rate at all. It is added to your total income and taxed at the slab rate that applies to you as an NRI.

For most NRIs realising a meaningful one-off gain, the gain itself pushes you straight to the top slab of 30%, plus surcharge and cess. There is no 20% concession here; the 20% short-term rate under Section 111A is for listed shares only. An employee who exercised ESOPs eighteen months ago and sells in a secondary should expect roughly 30% plus surcharge and cess on the gain, not the 12.5% number the headlines quote. The 24-month line is therefore the single most valuable date in your whole exit. Crossing it can more than halve your tax. If you are weeks away from it and the secondary timing is flexible, that flexibility is worth using.

The buyer's job: Section 195 TDS, and why it is on you to fix it

Here is the structural feature of selling unlisted shares as an NRI that surprises buyers and sellers alike. Whoever pays you must deduct tax at source under Section 195 before the money leaves their hands. This is the same mechanism that applies when an NRI sells property, and it has the same teeth.

Section 195 applies to any sum chargeable to tax paid to a non-resident. The capital gain on your shares is chargeable to tax, so the payer, whether that is a secondary buyer, a fund, a strategic acquirer, or the company itself, is required to withhold. The headline default rates the buyer will reach for, before any certificate, are:

• Long-term gain: 12.5% plus surcharge and 4% cess, which at the higher surcharge bands grosses up to roughly 14.95%.
• Short-term gain: the slab or 30% rate plus surcharge and cess, grossing up well above 30%.

The liability for getting this right sits on the buyer, not you. If they pay you gross and deduct nothing, the Assessing Officer can recover the tax, interest and penalty from the buyer under Section 201. This is exactly why sophisticated buyers, funds and corporates insist on either a withholding computation certified by a chartered accountant in Form 15CB, with the remittance reported in Form 15CA, or a lower-deduction certificate from you, before they will release funds.

The trap for you is the flip side. Section 195 is meant to be charged on the income element, the gain, not the gross sale price. But a nervous buyer faced with a non-resident seller and personal liability under Section 201 will often deduct on a conservative basis if you have not handed them anything official. In the worst cases buyers withhold on a much larger figure than the true gain, your cash is stranded with the tax department, and you spend a year chasing a refund. The fix is to get ahead of it.

The lower-deduction certificate: Form 13 under Section 197

The clean solution is a lower-deduction or nil-deduction certificate under Section 197, applied for in Form 13 to the Assessing Officer (the international taxation circle) before the transaction completes.

You give the AO your cost of acquisition, the sale consideration, the holding period and the resulting gain, and they issue a certificate directing the buyer to deduct only on the actual taxable gain at the correct rate, not on the gross price. The buyer then withholds exactly what the certificate says and remits the rest to you. This is the difference between receiving 85% of your gain net of tax, and receiving 50% of your gross proceeds while you wait twelve to eighteen months for the balance.

Practical notes from doing this:

• Apply early. The certificate can take several weeks. Start it as soon as the deal terms are firm, not on the day of completion.
• You need a PAN. No PAN, and Section 206AA forces a higher floor on the withholding. Sort the PAN for NRIs before anything else.
• The DTAA can lower it further where the treaty caps the rate on capital gains. Most treaties leave India free to tax gains on shares of an Indian company, so the certificate route, not the treaty, is usually what reduces the withholding on a straight sale. The treaty matters far more on a buyback, as below.

I have a full walkthrough in the lower TDS certificate, Form 13 guide and the mechanics of recovering over-deducted tax in the TDS for NRIs and refunds guide. For an unlisted-share exit of any size, the Form 13 is not optional housekeeping. It is the single highest-return hour of paperwork in the whole deal.

Buyback: the mechanic that flips on the date

A buyback is not a sale to a third party. The company itself repurchases your shares and extinguishes them. For an NRI, the tax treatment of a buyback has lurched twice in two years, and which rule applies depends entirely on when you are paid (for the old-to-current window) and when the buyback is announced (for the 2026 change).

Until 30 September 2024: the company paid a buyback distribution tax of 20% plus surcharge and cess under the old Section 115QA, and the proceeds reached you tax-free under Section 10(34A). You paid nothing in India. Clean.

1 October 2024 to 31 March 2026: the Finance (No. 2) Act 2024 scrapped Section 115QA and inserted Section 2(22)(f), treating the entire buyback consideration as a deemed dividend in your hands, with no deduction for your cost. The company deducts TDS under Section 195 at 20% plus surcharge and cess, or the lower DTAA dividend rate if you furnish a TRC and Form 10F. Your cost does not vanish entirely; under Section 46A the sale consideration is deemed nil and you book a capital loss equal to your cost, usable only against other capital gains and carried forward for eight years. For most NRIs with no other Indian capital gains, that loss is worthless. This is the worst regime of the three, and I cover it in full in the NRI tax on buyback versus dividend guide.

Buybacks announced on or after 1 April 2026: Budget 2026 reverses the 2024 characterisation. Buyback proceeds move back out of dividend and into capital gains. You are taxed only on the gain, sale price minus cost, at 12.5% long-term or your slab rate short-term, the same as a secondary sale. The catch sits elsewhere: an additional buyback tax now falls on promoter shareholders, with the effective burden landing higher for promoters (reported at roughly 22% for corporate promoters and 30% for non-corporate promoters). For a non-promoter NRI angel or ESOP holder, the 1 April 2026 change is straightforwardly good news, it restores cost deduction and removes the stranded-loss problem. For a founder classified as a promoter, the additional tax has to be modelled before choosing buyback over a secondary sale.

The timing rule is the thing to hold onto: for the deemed-dividend window the trigger is the date you are paid; for the 2026 capital-gains restoration the trigger is the date the buyback is announced. A buyback announced in March 2026 but paid in May 2026 still sits in the old deemed-dividend regime. Read the announcement date and the payment date carefully.

Worked example: a secondary sale versus a buyback, same shares

Take an NRI angel in Dubai. In FY 2021-22 she invested Rs 20,00,000 for shares in an Indian SaaS startup. In FY 2026-27 she has two ways out, both valuing her stake at Rs 90,00,000. She has held the shares for more than 24 months, so any gain is long-term.

Route A: secondary sale to an incoming fund.

Item	Amount
Sale consideration	Rs 90,00,000
Less: cost of acquisition	Rs 20,00,000
Long-term capital gain	Rs 70,00,000
Tax at 12.5% (Section 112(1)(c))	Rs 8,75,000
Add: surcharge (assume 15% band)	Rs 1,31,250
Add: 4% cess	Rs 40,250
Total India tax	Rs 10,46,500

She applies for a Form 13 certificate, the fund deducts Rs 10,46,500 under Section 195 and remits her Rs 79,53,500. Her India tax is settled. There is nothing more to pay; she files a return to confirm the position and claim any small refund if the deduction was rounded up. Effective rate on the gain: about 14.95%.

Route B: the company buys back the same shares, paid in February 2026.

Because she is paid before 1 April 2026, the full Rs 90,00,000 is a deemed dividend under Section 2(22)(f). Her Rs 20,00,000 cost is not deducted. The India-UAE treaty caps the dividend rate at 10%, so with a TRC and Form 10F the company deducts:

Item	Amount
Deemed dividend (full proceeds)	Rs 90,00,000
TDS at 10% (UAE treaty dividend rate)	Rs 9,00,000
Net received	Rs 81,00,000
Capital loss booked under Section 46A (nil minus cost)	Rs 20,00,000
Value of that loss to her (no other Indian capital gains)	Rs 0

At a glance Route B looks cheaper, Rs 9,00,000 against Rs 10,46,500. But look at what each tax is charged on. Route A taxes only her Rs 70,00,000 gain. Route B taxes her entire Rs 90,00,000, including the Rs 20,00,000 of her own capital coming back to her, and the Rs 20,00,000 capital loss that is supposed to compensate is worthless to her because she has no other Indian capital gains to absorb it. She is paying tax on returned capital. Had her treaty been the India-US treaty (dividend rate 25% for individuals) or India-UK (15%), the buyback would have been dramatically worse than the sale. The UAE's low dividend rate is the only reason the buyback looks competitive here, and even then she is taxed on money that was always hers.

The honest read on this pair: for the 1 October 2024 to 31 March 2026 window, a secondary sale almost always beats a buyback for an NRI on appreciated unlisted shares, unless your treaty dividend rate is very low and you have large capital gains elsewhere to soak up the stranded loss. From 1 April 2026, when buybacks return to capital gains treatment, the two routes converge for non-promoters and you choose on commercial terms, not tax.

Edge cases

Selling below fair market value: Section 56(2)(x) and Rule 11UA. Capital gains tax is the seller's problem. But there is a second tax that lands on the buyer, and on you if you are ever on the receiving end of cheap shares. Under Section 56(2)(x), if someone receives unlisted shares for a consideration below their fair market value by more than Rs 50,000, the shortfall is taxed as income from other sources in the recipient's hands. FMV is computed under Rule 11UA, typically a Net Asset Value or Discounted Cash Flow calculation certified by a merchant banker or chartered accountant. So if you sell your startup shares to a friend at a sweetheart price well below the Rule 11UA value, the friend can be taxed on the gap, and if you buy shares cheap, you can be. This is not theoretical in family transfers and founder-to-founder deals. Get a defensible valuation before transferring at anything other than an arm's-length price.

FEMA pricing guidelines on resident-to-non-resident transfers. Income tax is only half the rulebook; FEMA is the other half, and it sets a floor and a ceiling on the price itself. When an NRI buys unlisted shares from a resident, the price must be at or above the fair value determined under internationally accepted pricing methodology, certified by a SEBI-registered Category I merchant banker or a chartered accountant. When an NRI sells unlisted shares to a resident, the price must be at or below that fair value. The logic is that FEMA does not want capital leaving the country cheaply or entering on inflated terms. The transfer has to be reported on Form FC-TRS through the authorised dealer bank, usually within sixty days of receipt of funds. Get the FEMA pricing wrong, or skip the FC-TRS, and the transaction can be treated as a contravention with compounding penalties, entirely separate from any tax. A deal that is tax-clean but FEMA-non-compliant is not a clean deal.

The two valuations can pull in opposite directions. Note the squeeze: Section 56(2)(x) wants the price not below FMV to protect the buyer, and FEMA wants an NRI selling to a resident to transact not above fair value. On a resident buying from an NRI, both rules push toward transacting at fair value. Price at the certified fair value and document it, and you satisfy both. Deviate, and you can trip one rule or the other regardless of which way you move.

IPO conversion: when unlisted becomes listed. If you hold pre-IPO shares and the company lists, your shares become listed, but the tax treatment of your eventual sale depends on the holding period and on whether the sale attracts STT. The holding period is continuous, your original acquisition date carries through the IPO; you do not reset the clock. Once listed and sold on-market with STT paid, the gain falls under Section 112A, which means the 12-month long-term period and the Rs 1.25 lakh annual exemption become available, generally a better regime than the unlisted Section 112 treatment. So holding through an IPO and selling post-listing can be more tax-efficient than a pre-IPO secondary, though it carries lock-in and market risk the secondary does not. Weigh the certainty of a pre-IPO exit against the better tax treatment of a post-listing sale.

ESOPs carry a second tax layer. If your unlisted shares came from exercised ESOPs, remember you were already taxed once, at exercise, on the perquisite value (the difference between fair value and exercise price), through payroll. Your cost of acquisition for capital gains is the fair value used at exercise, not the exercise price you paid. Get that base wrong and you will overstate your gain and overpay. The full treatment is in the RSU and ESOP taxation guide for NRIs.

Home-country tax and the foreign tax credit

India taxing the gain is rarely the end of it. As a tax resident of the UK, the US, Canada or the UAE, you may owe tax on the same gain at home, and the question is whether you are taxed twice.

The mechanism that prevents double taxation is the foreign tax credit (FTC) under the relevant Double Taxation Avoidance Agreement. Broadly, your country of residence taxes your worldwide gain and gives you a credit for the India tax you actually paid, capped at the home-country tax on that same gain. So if India takes 14.95% and your home country would charge 20% on the gain, you pay the 14.95% to India and roughly the 5% balance at home. If India's tax exceeds your home-country tax on the gain, the excess generally is not refunded, but it is not double taxed either.

Country-specific points that catch people:

• UAE residents pay no personal tax on the gain at home, so the India tax is the whole bill. The UAE's value to you is on the buyback dividend rate (10% under the treaty), not on a straight capital gain, where the treaty leaves India free to tax.
• US persons must report the gain on a US return and claim the India tax as a foreign tax credit on Form 1116. The US taxes the gain regardless of the India treatment; the credit is what stops it being taxed twice.
• UK and Canada residents similarly report and credit, subject to each country's own holding-period and rate rules, which differ from India's.

To claim the credit cleanly you need proof of the India tax: the TDS certificate or Form 16A, your India return, and in India itself, if you are claiming an FTC on the other side, Form 67. The mechanics of the credit and the treaty are in the DTAA relief for NRIs guide, the foreign tax credit and Form 67 guide, and the TRC and Form 10F guide. The order of operations matters: India taxes first at source, then your home country credits. Keep every India document, because your home-country tax authority will want to see what you actually paid before it gives you the credit.

What NRI founders, angels and ESOP holders miss

Pulling the threads together, the recurring mistakes on an unlisted-share exit are predictable:

• Assuming the listed-share rules apply. No Rs 1.25 lakh exemption, no 12-month long-term period, no flat 20% short-term. The clock is 24 months, the long-term rate is 12.5%, and short-term is slab, usually 30%.
• Forgetting Section 195 entirely. The buyer must withhold, and if you have not handed them a Form 13 certificate, they will often over-withhold to protect themselves. Sort the certificate before completion.
• Treating a buyback like a sale. Until 1 April 2026 a buyback is a deemed dividend on the full proceeds, not a gain on the appreciation, and the cost relief is a capital loss most NRIs cannot use.
• Ignoring FEMA. A deal priced on commercial terms can still breach the FEMA pricing floor or ceiling, or skip the FC-TRS filing. That is a separate contravention from any tax.
• Mispricing against FMV. Sell too far below Rule 11UA fair value and the buyer gets taxed under Section 56(2)(x); the law has its own view of the price even when both sides agree on a number.
• Using the wrong cost base for ESOP shares. Your base is the fair value taxed at exercise, not the exercise price.
• Skipping the foreign tax credit. You may owe tax at home too, and the only way to avoid double taxation is to document the India tax and claim the credit.

The closing read

The honest read on exiting unlisted Indian shares as an NRI is that the tax is rarely the headline 12.5%, and the structure of the exit matters as much as the rate. A long-held secondary sale is the cleanest outcome: a flat 12.5% on the gain, settled through a Section 195 deduction you can size correctly with a Form 13 certificate, with the foreign tax credit mopping up any home-country exposure. A short-term sale is a different and much heavier animal, taxed at your slab rate up to 30%, so the 24-month line is the most valuable date in the whole transaction and worth waiting for where you can. A buyback is a coin that lands differently depending on the date: a deemed dividend on your full proceeds until 31 March 2026, then capital gains again from 1 April 2026, with a new sting for promoters.

For most NRI angels and ESOP holders sitting on appreciated unlisted stock in 2026, the framing is simple. Cross the 24-month line. Sell rather than tender into a pre-April-2026 buyback unless your treaty dividend rate is very low and you have capital gains elsewhere to absorb the stranded loss. Get the Form 13 done before completion. Price at certified fair value to keep both Section 56(2)(x) and FEMA quiet, and file the FC-TRS. Then claim your credit at home. Do those five things and the exit is taxed at close to its true economic cost, not at the inflated number an unprepared deal produces.

Related guides

• ITR filing guide for NRIs, AY 2026-27
• Capital gains tax on NRI shares and mutual funds
• NRI tax on buyback versus dividend
• RSU and ESOP taxation for NRIs
• Lower TDS certificate, Form 13
• TDS for NRIs and refunds
• DTAA relief for NRIs
• DTAA mechanics: TRC and Form 10F
• Foreign tax credit and Form 67
• Capital gains exemptions under Sections 54, 54EC and 54F
• Capital loss set-off and carry-forward for NRIs
• NRI dividend tax in India
• PAN for NRIs
• NRI residency and RNOR rules

Disclaimers

This guide is general information, not tax or investment advice, and it does not create an adviser relationship. Tax law, FEMA pricing rules and treaty rates change, and the buyback regime in particular shifts again on 1 April 2026; figures and rates here reflect the position as understood in early 2026. The treatment of any specific transaction depends on your residential status, your holding period, your country of tax residence, the precise wording of the applicable treaty, and the facts of the deal. Section 195 withholding, Form 13 certificates, Rule 11UA valuations and FEMA FC-TRS filings carry hard deadlines and personal liability for the parties involved. Before completing an unlisted-share exit of any size, take advice from a chartered accountant for the India tax and FEMA position and from a qualified adviser in your country of residence for the home-country tax and foreign tax credit. The worked examples are illustrative and use assumed surcharge bands; your own surcharge, cess and effective rate will depend on your total income.