Every startup investment ends in one of four ways – secondary sale, buyback, M&A or write-off – and the Income-tax Act 2025 prices each door differently. Unlisted shares held past 24 months exit at 12.5%. Buybacks, after two regime flips in as many years, are capital gains again from 1 April 2026 – with a special surcharge if you are a promoter. Non-residents lost the currency-fluctuation shield. Losses carry eight years but only against the right income. This is the complete capital-gains map for startup investors, on the new section numbers almost nobody has updated for.
The base rates (FY 2026-27)
| Asset / event | Holding | Rate | Section (old → new) |
|---|---|---|---|
| Unlisted startup shares – LTCG | > 24 months | 12.5%, no indexation | 112 → s.197 |
| Unlisted – STCG | ≤ 24 months | Slab rates | – |
| Listed equity (post-IPO exit) – LTCG | > 12 months | 12.5% above ₹1.25 lakh | 112A → s.198 |
| Listed – STCG | ≤ 12 months | 20% | 111A → s.196 |
| CCPS/CCD/CN conversion | – | Not a transfer – no tax; holding period includes instrument period | 47 → s.70 |
| Reinvestment relief (residential house) | – | Exemption up to ₹10 crore caps | 54F → s.86 |
The 24-month cliff is worth real money: on a ₹40 lakh gain at the 30% slab, selling at month 23 costs about ₹12 lakh; waiting past month 24 costs ₹5 lakh. And because conversions are not transfers, CCPS or convertible-note holding time counts – an instrument held since 2025 converting in 2027 sells long-term immediately (see the instrument guide).
Buybacks: three regimes, know your dates
| Buyback completed | Treatment |
|---|---|
| Before 1 Oct 2024 | Company paid ~23.3% buyback tax; receipt exempt for shareholder |
| 1 Oct 2024 – 31 Mar 2026 | Entire proceeds = dividend at slab, no cost deduction; cost stranded as capital loss (s.69, old 46A) |
| On/after 1 Apr 2026 | Capital gains again (Finance Act 2026): consideration minus cost under amended s.69 – 12.5% LTCG for ordinary shareholders – plus an additional tax for promoter shareholders |
Non-residents: the currency shield is gone
An NR who invested USD 1 million at ₹70 and exits at USD 1 million when the rupee is at ₹84 has made nothing in dollars – but Indian tax sees ₹1.4 crore of gain. The old first-proviso computation (gains measured in the investment currency) does not apply to unlisted shares: the Legatum Ventures ruling treated the concessional-rate provision as a self-contained code, and the Finance (No.2) Act 2024 codified the result – NR unlisted LTCG at a flat 12.5%, no indexation, no forex adjustment (now s.197). On the example: ₹17.5 lakh of tax on a zero-dollar gain. The remaining levers are treaty overrides (grandfathered Mauritius/Singapore positions where they survive) and, on the FEMA side, remembering the exit-price cap – run the withholding numbers on the repatriation tax calculator and the route logic in the repatriation guide.
Losses: the 8-year consolation
Most angel portfolios hold more write-offs than wins, and the loss rules decide how much the wins really net. Under s.111 (old 74): long-term capital losses set off only against long-term gains; short-term losses against either; unabsorbed losses carry forward eight tax years, conditional on filing the return by the due date in the loss year. Pre-2026 losses transition intact. Three startup-specific notes. A genuine write-off needs a transfer to crystallise the loss – a company merely going quiet does not create one; a distress sale, liquidation distribution or (now) even a strike-off-linked extinguishment with paper does. Interim-window buyback losses (the stranded-cost kind) remain ordinary capital losses. And s.92 deemed income – the below-FMV purchase tax – is other-source income: capital losses cannot shelter it; the only mercy is the cost step-up. Worked chain: FY 2025-26 distress sale LTCL ₹45 lakh + interim buyback loss ₹20 lakh = ₹65 lakh pool; FY 2026-27 exit LTCG ₹80 lakh → taxable ₹15 lakh → tax ₹1.875 lakh instead of ₹10 lakh. The pool only exists because both returns were filed on time.
Structures that change the answer
AIF investors: Category I/II funds are pass-through (s.224, old 115UB) – gains keep their character and reach you as if you invested directly, with the fund’s securities statutorily capital assets; TDS applies on distributions (10% resident; treaty rates for NRs). NRIs on Schedule IV non-repatriation keep domestic treatment throughout – the same rates with none of the FEMA exit friction (the comparison). Reinvestment relief: s.86 (old 54F) can exempt LTCG on startup shares reinvested in one residential house, with the ₹10 crore cost and consideration caps intact – a genuine planning lever for a founder’s first big exit. Classification comfort: the CBDT’s 2016 positions – unlisted share gains are capital gains regardless of holding period – carry over automatically to the new Act, so business-income recharacterisation of an investment portfolio remains the exception, not the rule.
Planning an exit or cleaning up a portfolio?
My Cloud Accountant models exit routes – secondary vs buyback vs structure – on your actual numbers, including the FA-2026 promoter surcharge and treaty positions.
Talk to an expertFrequently Asked Questions
Does the 12.5% rate apply to foreign investors too?
Yes – NR unlisted LTCG is 12.5% flat (plus applicable surcharge and cess), with no indexation and no currency adjustment, subject to any better treaty rate. Withholding applies at source under the consolidated TDS code; a treaty claim obliges the NR to hold a TRC and file an Indian return.
Is ESOP-share sale taxed the same way?
Yes, with one twist: cost of acquisition is the FMV already taxed as perquisite at exercise, and the holding period runs from exercise. An employee selling into a post-April-2026 buyback is on capital gains like everyone else – and almost never a “promoter” for the surcharge. Full mechanics in the ESOP guide.
Can I set off startup losses against salary or business income?
No – capital losses only ever set off against capital gains (long-term losses only against long-term gains). They cannot shelter salary, business income, or s.92 deemed income. Plan exits so gains and harvestable losses land in overlapping years.
Which exit door is cheapest now?
For a non-promoter with 24+ months of holding, secondary sale and post-April-2026 buyback both land at 12.5% – choose on price and execution. For promoters, the buyback surcharge (≈22–30% aggregate) makes a genuine third-party secondary meaningfully cheaper. M&A share swaps outside court-approved mergers are taxable events – model before signing. And an IPO converts you to the listed regime prospectively.
Last reviewed: August 2026. Income-tax Act 2025 ss.69, 70, 86, 92, 111, 196–198, 224; Finance Act 2026 buyback amendments (promoter additional tax – rates per professional commentary pending CBDT clarification on TDS and transition); Legatum Ventures (ITAT Mum) as codified by Finance (No.2) Act 2024.