Inheriting Unlisted Shares: Process & Tax Rules

Reviewed by Team BuyUnlistedShares Research Desk ·

What Does It Mean to Inherit Unlisted Shares?

Inheriting unlisted shares is the process by which a beneficiary, such as a legal heir or nominee, legally acquires ownership of pre-IPO or private company shares after the original shareholder's death. This legal procedure is known as 'transmission of shares' and is distinct from a voluntary 'transfer' like a sale or gift. Understanding this process is crucial as it involves specific documentation and has unique tax implications for the recipient.

What is the Difference Between Share Transfer and Share Transmission?

While both terms involve a change in share ownership, they are fundamentally different in legal terms, intent, and procedure. Confusing the two can lead to incorrect paperwork and delays.

• Transfer of Shares: This is a voluntary act initiated by the living shareholder. It typically happens through a sale (with consideration) or a gift (without consideration). It requires a formal Share Transfer Deed (Form SH-4) and is an active decision by the owner to pass on the shares.
• Transmission of Shares: This is an involuntary process that occurs due to the operation of law, most commonly upon the death of a shareholder. No consideration is paid, and no transfer deed is required. Ownership passes to the legal heirs or nominees as per succession laws or a registered nomination.

Here’s a simple breakdown:

• Reason: Transfer is by choice; Transmission is by law (due to death).
• Initiator: Transfer is done by the shareholder; Transmission is initiated by the legal heir/nominee.
• Consideration: Transfer may involve payment (a sale); Transmission never involves payment from the heir.
• Documentation: Transfer requires a Share Transfer Deed; Transmission requires a Transmission Request Form along with proof of death and succession.

How Does the Share Transmission Process Work?

The process of transmission involves notifying the company and providing a set of legal documents to prove your claim as the rightful new owner. The exact documents can vary based on whether a will exists or a nominee was appointed.

Step 1: Initial Notification

The first step for the legal heirs or nominee is to formally inform the company or its Registrar and Transfer Agent (RTA) about the shareholder's demise. You should request the specific procedure and the necessary forms for share transmission.

Step 2: Document Submission

This is the most critical step. You will need to compile and submit a set of documents to the company/RTA. The requirements differ based on the succession scenario:

Scenario A: When a Will Exists

If the deceased shareholder has left a valid will, the executor or beneficiary named in the will must typically provide:

• A formal Transmission Request Form.
• Original or notarised copy of the Death Certificate.
• A copy of the Probated Will. A probate is a copy of the will certified by a court of competent jurisdiction, which confirms its validity. In some cases, a Succession Certificate or Letter of Administration may be required.
• PAN Card and address proof (like Aadhaar) of the beneficiary.
• Client Master List (CML) of the beneficiary’s demat account where the shares will be credited.
• Original share certificates, if the shares were held in physical form.

Scenario B: When There is No Will (Intestate Succession)

If the shareholder passed away without a will, the process relies on succession laws. The documents required are more stringent to protect the company from future claims:

• All documents listed above (except the will).
• A Succession Certificate issued by a court is almost always mandatory. This certificate legally identifies the rightful heirs of the deceased.
• An Affidavit and an Indemnity Bond may be requested. These documents are signed by the legal heirs to declare their claim and to indemnify the company against any losses arising from a wrongful transmission. The company might also ask for a surety to co-sign the indemnity bond.

Scenario C: When a Nominee is Registered

This is the simplest and most efficient scenario, highlighting the importance of nomination.

• A simple Transmission Request Form for nominees.
• Notarised copy of the Death Certificate.
• Proof of identity and address of the nominee (PAN, Aadhaar).
• CML of the nominee's demat account.

Important Note: While a nominee can receive the shares easily, they legally hold them as a trustee on behalf of all legal heirs. If the nominee is not the sole legal heir, they are obligated to distribute the assets as per the will or succession laws.

What are the Tax Implications of Inheriting Unlisted Shares?

The tax treatment of inherited shares is a common point of confusion. It's best understood in two parts: the tax at the time of receiving the shares, and the tax at the time of selling them.

Tax on Receiving the Shares

In India, there is currently no inheritance tax. Furthermore, as per Section 56(2)(x) of the Income Tax Act, any asset received through a will or inheritance is exempt from being treated as taxable income for the recipient. Therefore, when you inherit unlisted shares, you do not have to pay any tax at the moment of transmission.

Tax on Selling the Inherited Shares

Capital gains tax becomes applicable only when you decide to sell the inherited shares. The calculation has two special rules:

1. Cost of Acquisition: The purchase price for you (the heir) is considered to be the price that the original shareholder paid for the shares. It is not the market value on the date you inherited them.
2. Period of Holding: To determine if the gain is long-term or short-term, the holding period is calculated from the date the original shareholder acquired the shares, not from the date you received them. For unlisted shares, a holding period of more than 24 months is considered long-term.

• Long-Term Capital Gains (LTCG): If the total holding period is over 24 months, the profit is taxed at 20% after applying the indexation benefit.
• Short-Term Capital Gains (STCG): If the total holding period is 24 months or less, the profit is added to your total income and taxed at your applicable income tax slab rate.

Illustrative Example: Calculating Capital Gains on Inherited Shares

Let's consider a scenario to understand the tax calculation. (Note: All figures are for illustrative purposes only and do not constitute financial advice.)

• Original Purchase: Mr. Kumar bought 500 unlisted shares of 'FutureTech Pvt. Ltd.' in June 2015 (FY 2015-16) for ₹200 per share. His total investment was ₹1,00,000.
• Inheritance: Mr. Kumar passed away, and his son, Rohan, inherited these shares in February 2024 (FY 2023-24).
• Sale: Rohan sells all 500 shares in May 2024 (FY 2024-25) for ₹1,200 per share, receiving a total of ₹6,00,000.

Here is how Rohan's capital gains tax would be calculated:

1. Sale Consideration: ₹6,00,000
2. Period of Holding: Calculated from Mr. Kumar's purchase date (June 2015) to Rohan's sale date (May 2024). This is well over 24 months, making it a Long-Term Capital Gain (LTCG).
3. Cost of Acquisition for Rohan: Mr. Kumar's original cost, which is ₹1,00,000.
4. Indexed Cost of Acquisition: To account for inflation, we use the Cost Inflation Index (CII).
5. - CII for the year of purchase (FY 2015-16): 254
6. - CII for the year of sale (FY 2024-25): Let's assume it is 380 (this is an illustrative value as the official number for this FY is not yet released).
7. - Indexed Cost = (Original Cost × CII of Sale Year) / CII of Purchase Year
8. - Indexed Cost = (₹1,00,000 × 380) / 254 = ₹1,49,606 (approx.)
9. Long-Term Capital Gain: Sale Consideration - Indexed Cost of Acquisition
10. - LTCG = ₹6,00,000 - ₹1,49,606 = ₹4,50,394
11. Tax Payable: 20% of LTCG (+ applicable cess)
12. - Tax = 20% of ₹4,50,394 = ₹90,078.80

Frequently Asked Questions

Is the transmission process different for physical and demat shares?

The underlying legal requirement (proof of succession) is identical. However, the procedural steps differ slightly. For physical shares, you submit the original certificates, and the company issues new certificates in the heir's name or dematerialises them into the heir's demat account. For shares already in demat form, the Depository Participant (DP) and RTA facilitate the debit from the deceased's account and credit to the heir's account upon submission of the required documents.

What if the value of inherited shares is very high?

The legal process does not change with value. However, for holdings of significant value, companies and RTAs are likely to be extremely diligent. They will almost certainly insist on a court-certified document like a Probated Will or a Succession Certificate to ensure the transmission is legally sound and to protect themselves from any future disputes or claims from other potential heirs.

Can a nominee sell the shares immediately after transmission?

Yes. Once the shares are transmitted to the nominee's demat account, they become the registered owner and have the right to sell them (subject to any lock-in period on the shares themselves). However, it is critical to remember that under Indian law, a nominee is a custodian or trustee for the actual legal heirs. If the nominee is not the sole legal heir, they are legally bound to distribute the sale proceeds to the rightful heirs as per the deceased's will or the applicable succession laws.

What happens if the original purchase documents are lost?

Losing original purchase records can complicate the tax calculation. To establish the 'cost of acquisition', you can try to obtain transaction history from the company, its RTA, or bank statements of the deceased. If the shares were acquired before April 1, 2001, you can use their Fair Market Value (FMV) as of that date as the cost. If no proof of cost can be found for shares acquired after this date, the income tax authorities may treat the cost as nil, which could result in a significantly higher capital gains tax liability. Consulting a tax professional is advisable in such cases.

Do I need a succession certificate even if I am the only child?

In many cases, yes. From a company's perspective, being the 'only child' does not automatically exclude the possibility of other Class I legal heirs, such as the deceased's spouse or mother. To avoid any legal risk, companies often insist on a Succession Certificate if there is no registered nominee or a clearly probated will, regardless of the family structure.

How are inherited ESOPs treated?

Inheriting Employee Stock Options (ESOPs) is more complex. The company's ESOP scheme rules dictate whether unvested options lapse or can be passed on to a legal heir. If the options were vested but not exercised, the heir can usually step into the shoes of the employee and exercise them. The tax treatment involves two stages: a perquisite tax on the difference between the Fair Market Value (FMV) on the exercise date and the exercise price, followed by a capital gains tax upon the eventual sale of the shares. This area is nuanced and often requires professional tax advice.

What if the deceased's demat account was a joint account?

If the demat account was held in 'Joint' mode with the 'Either or Survivor' clause, the process is not transmission but a simple deletion of the deceased's name. The surviving holder(s) just need to submit a request form to their Depository Participant (DP) along with a notarised copy of the death certificate. The shares will then automatically and fully belong to the surviving account holder(s).

This article was reviewed by Team BuyUnlistedShares Research Desk, who holds NISM Series XV (Research Analyst) certification and NISM Series V-A (Mutual Fund Distributor) certification. The desk is NOT a SEBI-registered Research Analyst or Investment Adviser. Nothing in this article constitutes investment advice or a recommendation to buy, sell, hold, or avoid any security. Investments in unlisted securities carry significant liquidity, regulatory, and listing-timing risks. Consult a SEBI-registered Investment Adviser for personalized financial planning.