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

Startup equity isn't taxed under Section 112A — it's Section 112, with its own rate, holding line, and a fair-value floor the buyer cares about too.

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, a different regime.

The section founders get wrong

• 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.

What 23 July 2024 changed

Before 23 July 2024, long-term gains on unlisted shares were taxed at 20% with indexation. From 23 July 2024, the rate fell to 12.5% but indexation was removed entirely. For founders, this is a clear improvement: a founder's cost of acquisition is usually near-zero (par value at incorporation), so indexation was worth almost nothing, while the rate cut is a real saving on the whole gain.

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 our note on Rule 11UA and 409A):

• Section 56(2)(x) on the buyer. If the buyer acquires shares below fair market value under Rule 11UA, the shortfall can be taxed in the buyer's hands as income from other sources — so investors 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 vice versa), FEMA pricing guidelines impose a fair-value floor or ceiling depending on direction.

Withholding: who deducts, and when

A resident-to-resident sale of unlisted shares does not carry a general withholding obligation — 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 Form 13 lower-deduction certificate can bring the withholding down to tax on the actual gain.

How the secondary rides alongside the primary round

Most founder secondaries happen inside a priced funding round, and they are two legally distinct transactions: the primary (company issues new shares, keeps the capital, governed by the round's SSA/SHA) and the secondary (founder sells existing shares, keeps the cash personally, governed by a separate transfer agreement with its own board and SHA approvals).

Planning levers before you sell

• The 24-month holding line — long-term vs short-term turns entirely on this, and each tranche (incorporation shares, ESOP exercise, bonus issue) has its own clock.
• Which tranche you sell — selling near-zero-cost incorporation shares first is usually most efficient.
• Residential status in the sale year — see our residential-status checker.
• Reinvestment reliefs under Sections 54F/54EC, within their conditions and caps.
• Spreading across financial years to manage surcharge thresholds, where the round permits it.

How Advisory Monks Consulting helps

A founder secondary is one of the genuinely founder-friendly corners of Indian tax right now — but the section is 112, not the 112A everyone quotes, and the price is anchored by a Rule 11UA valuation on both the seller's and buyer's side. We paper the transfer correctly alongside the primary round documents.

General information, not advice; capital-gains and pricing positions turn on the specific facts, holding period and residence involved. Section references above are to the Income-tax Act, 1961; the Income-tax Act, 2025 (in force from 1 April 2026) renumbers many sections — confirm current numbering before citing externally.

This note is general guidance, not tax or legal advice. Positions depend on your specific facts — speak with a partner before acting.