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Founder secondary sales: how selling unlisted shares is taxed in India.

A founder taking money off the table in a secondary is not taxed the way the internet assumes. The familiar 12.5%-with-a-₹1.25-lakh-exemption regime is for listed shares — startup equity sits under a different section, with its own rate, its own holding line, and a fair-value floor the buyer cares about as much as the seller. Here is the actual position.

August 2026 10 min read By the partnership

The section founders get wrong

Ask most founders how their share sale will be taxed and you will hear "12.5% long-term, with the ₹1.25 lakh exemption." That is Section 112A — and it does not apply to them. Section 112A governs listed shares sold on a stock exchange with Securities Transaction Tax paid. A founder selling unlisted startup shares in a secondary is taxed under Section 112, which is a different regime:

Long-term (shares held more than 24 months): 12.5% without indexation for transfers on or after 23 July 2024. No ₹1.25 lakh exemption — that carve-out is a Section 112A feature only.
Short-term (held 24 months or less): taxed at the founder's slab rate, which with surcharge and cess can reach roughly 39%.

The headline rate happens to be the same 12.5% for the long-term case, which is exactly why the confusion persists — but the missing exemption and the different holding-period arithmetic mean the actual liability, and the planning around it, are not the same.

What 23 July 2024 changed

The Budget 2024 change to unlisted-share taxation cut two ways at once. Before 23 July 2024, long-term gains on unlisted shares were taxed at 20% with indexation — your purchase cost was stepped up for inflation before the gain was computed, which materially reduced the taxable amount on long-held shares. From 23 July 2024, the rate fell to 12.5% but indexation was removed entirely.

For founders specifically, this is a clear improvement, and the reason is structural: a founder's cost of acquisition is usually near-zero — par value paid at incorporation. Indexation on a near-zero base was worth almost nothing, so losing it costs a founder almost nothing, while the rate cut from 20% to 12.5% is a real saving on the whole gain. The people who lose from the change are those who bought shares recently at a high price (where indexation would have sheltered a meaningful slice) — rarely the founder in a secondary.

The fair-value floor: why the buyer cares about your price

A founder secondary is not priced freely. Two mechanisms put a floor under it (see Rule 11UA and 409A for how the valuation piece works when a US entity is involved):

Section 56(2)(x) on the buyer. If the buyer acquires the shares below their fair market value as computed under Rule 11UA, the shortfall can be taxed in the buyer's hands as income from other sources. Investors will not knowingly walk into that charge, so they insist the secondary price is supported by a Rule 11UA valuation.
FEMA pricing, if cross-border. Where a resident founder sells to a non-resident investor (or a returning founder sells to a resident), FEMA pricing guidelines impose a fair-value floor or ceiling depending on the direction of the flow, again anchored to a valuation.

The practical consequence: a founder secondary is executed with a Rule 11UA valuation already in hand, doing double duty — defending the seller's own capital-gains computation against the assessing officer, and protecting the buyer from a Section 56 charge. (On why that valuation remains mandatory even after angel tax was abolished, see our note on Rule 11UA and 409A.)

Withholding: who deducts, and when

TDS on a secondary depends on the seller's residence. A resident-to-resident sale of unlisted shares does not carry a general withholding obligation the way an immovable-property sale does — the seller simply pays advance tax and reports the gain in their return. Where the seller is a non-resident, the buyer must withhold under Section 195 on the taxable gain, and — exactly as with NRI property sales — a Form 13 lower-deduction certificate can bring the withholding down to tax on the actual gain rather than a conservative gross figure. A returning-founder or NRI-founder secondary therefore inherits the whole withholding-and-certificate rhythm covered in our Form 13 LDC note.

How the secondary rides alongside the primary round

Most founder secondaries happen inside a priced funding round, and it is worth being precise that they are two legally distinct transactions stapled together:

The primary — the company issues new shares and keeps the capital. Governed by the round's Share Subscription Agreement and Shareholders' Agreement (see our note on SSA vs SHA).
The secondary — the founder sells existing shares and keeps the cash personally. Governed by a separate share-purchase/transfer agreement, with its own board and SHA approvals, transfer stamping, and the founder's personal tax reporting.

Investors typically cap the secondary component as a percentage of the round (they are funding growth, not founder liquidity), and the secondary price is usually pegged to the primary round price or set at a modest discount, supported by the same valuation. The most common avoidable error we see is treating the secondary as an appendix to the primary documents rather than a properly papered transfer — which surfaces later as a gap in the cap-table history that the next round's diligence flags.

A worked example

A founder acquired 100,000 shares at ₹10 par on incorporation five years ago. In the Series C, the lead permits a founder secondary of 20,000 shares at the round price of ₹1,200 per share, supported by a Rule 11UA valuation. The founder is resident. The gain is (₹1,200 − ₹10) × 20,000 = ₹2.38 crore, long-term (held well over 24 months), taxed under Section 112 at 12.5% without indexation — roughly ₹29.75 lakh plus applicable surcharge and cess. There is no ₹1.25 lakh exemption to net off (that is Section 112A only), and indexation would have added almost nothing on a ₹10 cost base, so the post-23-July-2024 regime is close to the best case for this founder. No buyer TDS applies (resident-to-resident); the founder pays advance tax and reports the gain. The secondary is papered as a distinct share transfer with board and SHA approval alongside the primary SSA/SHA, and the ₹1,200 price is documented against the valuation to keep both the founder's 112 position and the investor's Section 56 position clean.

Planning levers before you sell

A secondary is one of the few founder tax events with genuine advance-planning room, because the timing and structure are partly within your control. The levers worth checking before a sale, not after:

The 24-month holding line. Long-term treatment (12.5% under Section 112) versus short-term (slab rate, up to ~39%) turns entirely on holding more than 24 months from acquisition. For founders this is almost always satisfied on original incorporation shares, but not necessarily on shares acquired later — via a recent ESOP exercise, a bonus issue, or a prior secondary purchase. Each tranche has its own clock.
Which tranche you sell. Where you hold shares acquired at different times and costs, the tranche you sell changes both the holding-period test and the gain. Selling near-zero-cost incorporation shares first is usually most efficient, but the cap-table and any lock-in or vesting conditions constrain the choice.
Residential status in the sale year. A founder who has moved abroad, or is mid-transition through the RNOR window, faces a different withholding and possibly a different taxing-rights picture. Timing a secondary relative to a residency change can move the outcome materially — see our residential-status checker.
Reinvestment reliefs. Sections 54F and 54EC can shelter capital gains reinvested into a residential house or specified bonds respectively, within their conditions and caps. These are more commonly associated with property, but apply to capital gains generally and are worth modelling on a large secondary.
Spreading across financial years. Where the buyer and round permit, splitting a large secondary across two financial years can manage surcharge thresholds and cash-flow of the advance-tax liability — a smaller lever than the others, but free where it is available.

None of this changes the basic Section 112 character of the gain; it changes how much of it you keep. The common thread is that all of it has to be decided before the share-transfer is signed — a secondary, once executed, is done.

Common questions

How is a founder's secondary sale of unlisted shares taxed in India?

Under Section 112, not Section 112A. Section 112A — the 12.5% rate with a ₹1.25 lakh exemption that most people associate with equity — applies only to listed shares on which STT was paid. Unlisted shares fall under Section 112: long-term gains (held over 24 months) are taxed at 12.5% without indexation for transfers on or after 23 July 2024, with no ₹1.25 lakh exemption; short-term gains (held 24 months or less) are taxed at the founder's slab rate, which can reach around 39% with surcharge and cess. The distinction matters because people wrongly assume the ₹1.25 lakh exemption and listed-share mechanics apply to their startup equity.

What changed for unlisted share sales after 23 July 2024?

Before 23 July 2024, long-term gains on unlisted shares were taxed at 20% with indexation — the purchase cost was inflated for inflation before computing the gain. From 23 July 2024, the rate dropped to 12.5% but indexation was removed entirely. For a founder whose cost of acquisition is tiny (often par value on incorporation), losing indexation barely matters and the lower headline rate is a clear win. For someone who acquired shares more recently at a high price, the loss of indexation can outweigh the rate cut. The direction of the change is founder-friendly precisely because founders usually hold near-zero-cost equity.

Is there a minimum price at which a founder can sell shares to an investor?

Effectively yes, through two channels. If the buyer pays below fair market value as computed under Rule 11UA, the shortfall can be taxed in the buyer's hands under Section 56(2)(x) as income from other sources — so investors resist underpriced secondaries. And where the transaction is cross-border (a resident founder selling to a non-resident, or vice versa), FEMA pricing guidelines impose a fair-value floor or ceiling depending on direction. In practice a founder secondary is priced with a Rule 11UA valuation in hand, both to defend the seller's capital-gains position and to protect the buyer from a Section 56 charge.

Does the buyer withhold TDS on a founder secondary sale?

It depends on who the buyer is and where the seller is resident. A resident-to-resident sale of unlisted shares does not carry a general TDS obligation in the way a property sale does, though the seller pays advance tax and reports the gain. Where the seller is a non-resident, the buyer must withhold under Section 195 on the taxable gain, and a lower-deduction certificate (Form 13) can align the withholding to the actual gain rather than a conservative default. Cross-border secondaries therefore carry the same withholding-and-certificate rhythm as NRI property sales.

How does a secondary sale interact with the company's fundraise?

Founder secondaries usually ride alongside a priced primary round, and the two are legally distinct: the primary is the company issuing new shares for capital it keeps; the secondary is the founder selling existing shares for cash they keep personally. Investors often cap the secondary component as a percentage of the round, and the share price for the secondary is typically pegged to (or discounted from) the primary round price, supported by the same valuation. Getting the documentation right matters — the secondary needs its own share-transfer mechanics, board and SHA approvals, and tax reporting, separate from the SSA/SHA governing the primary.

The bottom line

A founder secondary is one of the few genuinely founder-friendly corners of Indian tax right now: the 2024 shift to 12.5% without indexation lands almost entirely as a saving for near-zero-cost founder equity. But the section is Section 112, not the 112A everyone quotes; the price is not free, because the buyer's Section 56 exposure and FEMA both put a valuation-anchored floor under it; and the transaction is a distinct transfer that has to be papered as one. Get those three right and a secondary is clean. Treat it as a footnote to the funding round and it becomes the cap-table gap the next diligence finds.

This note is general guidance and is not legal or tax advice; capital-gains and pricing positions turn on the specific facts, holding period and residence involved. Rule 11UA valuations and Form 15CB/Form 13 certifications are issued by the SEBI-registered Merchant Bankers and chartered accountants on our panel as part of the engagement. Get in touch to plan a secondary.

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