Transfer of shares refers to the shifting of ownership rights in a company’s capital from one person to another. This can occur through sale, gift, inheritance, or corporate restructuring. Transfers can happen with or without consideration, but both forms have distinct tax implications under the Income-tax Act, 1961. In transactions where the actual consideration is lower than the fair market value (FMV)—or even nil in the case of gifts—specific valuation and tax provisions come into play to avoid tax evasion and ensure fair reporting. This makes valuation central to both compliance and transparency.

Importance of Transfer of Shares

Share transfer plays a vital role in ownership restructuring, capital allocation, and investment decisions. For businesses, it supports fundraising, strategic exits, and wealth distribution. From a regulatory standpoint, it ensures proper taxation and reporting, especially when the transfer is between related parties or across borders. With the rise in private investments and cross-border holdings, understanding the implications of share transfers has become essential for businesses and investors alike.

Transfer of Shares: With or Without Consideration

1. With Consideration

This means the transferor receives something in return—usually money. For example, if a shareholder sells shares to an investor for ₹10 lakh, it’s a transfer with consideration. Here, the FMV (Fair Market Value) must be compared with the sale price to assess tax impact under capital gains and avoid underreporting of income.

2. Without Consideration

This includes gifts, inheritance, or free allotments. In such cases, there is no payment or benefit to the person transferring the shares. However, the person receiving them may still be taxed if the FMV exceeds the exemption limits, under Section 56(2)(x) of the Income-tax Act.

Types of Transfers

Transfers can broadly be categorized based on the residency status of the transferor and transferee:

1. Resident to Resident

Transfers of shares between two Indian residents fall squarely within the ambit of domestic laws, with the Income-tax Act, 1961 and the Companies Act, 2013 being the primary legislations governing such transactions.

Section 56(2)(x) taxes the recipient of shares (without or for inadequate consideration) if the fair market value (FMV) of the shares exceeds the consideration paid by more than ₹50,000. This is particularly relevant in off-market transfers, where shares may be transferred at book value or a nominal amount among related parties or family members. On the other hand, Section 50CA applies when unlisted shares are transferred for consideration less than their FMV, taxing the difference in the hands of the seller as capital gains.

Valuation becomes crucial in such cases to determine the FMV. For unlisted shares, Rule 11UA of the Income-tax Rules provides the accepted methodologies: Net Asset Value (NAV) and Discounted Cash Flow (DCF) methods, with the choice depending on the nature of the entity and availability of projections. Though these transactions do not fall under FEMA or RBI jurisdiction, care must still be taken to document the transaction properly, including board approvals, share transfer forms, and valuation reports, especially if parties are related.

2. Non-Resident to Resident

A share transfer from a non-resident to a resident involves cross-border capital movement and is subject to complex regulatory and taxation scrutiny. The primary legislation governing this type of transaction includes the Foreign Exchange Management Act (FEMA), 1999, the Income-tax Act, 1961, and the associated RBI guidelines. Such transactions require adherence to pricing norms, procedural compliance, and reporting obligations to the RBI. From a FEMA perspective, when a non-resident sells shares of an Indian company to a resident, the pricing guidelines must be adhered to. These guidelines prescribe that the shares of an unlisted company must not be transferred at a price below the fair valuation determined as per internationally accepted valuation methodologies, certified by a Chartered Accountant, Merchant Banker, or a practicing Cost Accountant. For listed shares, pricing must follow SEBI guidelines or market-observed price, whichever is applicable.

Income tax implications also arise. The non-resident seller may be liable to pay capital gains tax in India under Section 9 of the Income-tax Act, since shares of an Indian company are considered, capital assets situated in India. However, tax treaty benefits (DTAA) may be available in some cases, subject to furnishing of a Tax Residency Certificate (TRC) and satisfying anti-abuse rules like the Principal Purpose Test (PPT). The resident buyer may also have reporting obligations under Section 195, including deduction of tax at source (TDS) on the consideration payable to the non-resident, unless an exemption is obtained via a lower/nil deduction certificate under Section 197.

Furthermore, FC-TRS must be filed by the resident transferee with the RBI via the FIRMS portal within 60 days from the date of transfer. Non-compliance may attract penal consequences under FEM. Given the regulatory intricacies and tax sensitivities, such transactions necessitate professional valuation reports, legal opinions, and detailed documentation to withstand scrutiny. To read more click.

3. Non-Resident to Non-Resident

When shares of an Indian company are transferred from one non-resident to another, it may seem like an offshore transaction. However, the Indian regulatory and tax framework could still apply due to the principle of source-based taxation and the objective of maintaining foreign exchange discipline. Under the Income-tax Act, Section 9(1)(i) deems income from the transfer of a capital asset situated in India to be taxable in India. Shares of an Indian company, even if held by non-residents, qualify as capital assets situated in India. Thus, a non-resident-to-non-resident transfer of such shares may be liable for capital gains tax in India.

From FEMA and RBI standpoint, while this may be an offshore deal, FEMA triggers still arise if the underlying asset is an Indian company. RBI has clarified that such transfers, especially for unlisted companies, require prior reporting and may need approval, particularly in sensitive sectors or where FDI caps exist. The resident company may also be called upon to furnish transaction details to RBI or other authorities.

Valuation becomes particularly important in these cases. Even though both parties are outside India, transfer pricing norms under Section 92 of the Income-tax Act could apply if either party is an associate enterprise of an Indian resident entity. The transaction must occur at arm’s length price (ALP). Additionally, Rule 11UB and Rule 11UC may apply in case of indirect transfer provisions, especially when shares of a foreign company derive substantial value from Indian assets. In practice, regulatory risk is high in such transactions, especially in sectors like defense, telecom, or fintech. To ensure smooth compliance, valuation reports, legal vetting, and prior consultations with RBI or tax authorities may be prudent. To read more click.

4. Resident to Non-Resident

A share transfer from a resident to a non-resident is among the most regulated forms of transfer under Indian law, primarily because it results in a foreign capital outflow and has implications for both FEMA compliance and taxability in India. The controlling regulations are under FEMA (Non-Debt Instruments) Rules, 2019, and various RBI circulars, in addition to the Income-tax Act, 1961.

Under FEMA, such a transfer is considered a sale of capital instruments to a person outside India and must adhere to the pricing guidelines prescribed by the RBI. These require that the shares of an unlisted Indian company be transferred at not less than fair market value, as determined by a Category I Merchant Banker registered with SEBI or a Chartered Accountant using DCF or NAV methods, depending on the business model. If listed, the price must comply with SEBI’s pricing norms for preferential allotments or secondary market trades.

The transaction also requires prior reporting through Form FC-TRS, filed on the FIRMS portal within 60 days from the date of transfer. Any deviation from prescribed processes—such as delayed filings, incorrect valuation, or non-adherence to sectoral caps—may attract penalties under FEMA.

Taxation-wise, the resident seller is liable for capital gains tax on the transfer. If the shares are unlisted, long-term capital gains (held >24 months) are taxed at 20% with indexation. Short-term gains are taxed at the applicable slab rate. Also, if the transfer occurs at a price lower than FMV, Section 50CA could trigger, taxing the seller on the deemed consideration (FMV) instead of the actual sale price.

Additionally, certain sectors like defense, space, and insurance are under approval routes for foreign investment. Transfers in these sectors may require government clearance, even if FDI is permitted under the automatic route for fresh issuance.Given the regulatory and tax complexities, such transactions must be structured carefully, supported by detailed valuation reports, legal opinions, and RBI filings to avoid scrutiny and ensure compliance. To read more click.

Types of Transfer of Shares

1. Equity Shares



1. Quoted Equity Shares

Quoted equity shares are those listed and traded on recognized stock exchanges such as the NSE or BSE. Their transfer generally happens through market mechanisms at prevailing prices. In such cases, valuation is transparent as the traded price reflects real-time market consensus. However, when such shares are transferred off-market or as a gift, special valuation rules kick in, and FMV must be computed to ensure proper tax compliance.

Tax Impact:

• Section 56(2)(x) applies if shares are received without or for inadequate consideration.
• Section 50CA ensures capital gains are calculated using FMV if transfer price is lower.
2. Unquoted Equity Shares

Unquoted shares are not listed on any stock exchange and thus do not have a publicly available market price. Transfers involving such shares—common in private companies, startups, and family businesses—require scientific valuation methods to determine their fair value. This becomes crucial when shares are transferred to relatives, employees, or investors, especially where consideration is absent or below FMV.

Tax Impact:

• Section 56(2)(x)
• Section 50CA applies to capture tax on undervalued transactions.
2. Securities Other Than Equity Shares

This category includes financial instruments like preference shares, debentures, bonds, CCPS, OCPS, and other hybrid securities. These instruments may not offer ownership control or voting rights like equity shares, but they hold economic value through fixed returns or conversion rights. Transfers of such instruments—particularly between group entities or during restructuring—also require valuation, especially where the transaction is not at arm’s length or where consideration is not easily determinable. The valuation for these instruments ensures that tax authorities can determine the true income or capital gains embedded in such instruments.

Tax Impact:

• Section 56(2)(x) for gifts or undervalued transfers
• Section 50CA is extended to ensure FMV-based capital gains taxation

Governing Laws

1. Equity Shares
1. Quoted Equity Shares
1. Income-tax Act:
• Sections 56(2)(x) – This section taxes money or property (including shares) received without or for inadequate consideration if the value exceeds ₹50,000. The excess amount is treated as income in the hands of the recipient.
• Section 50CA – If shares are transferred for a value lower than FMV (as per Rule 11UA), then FMV is deemed the sale consideration for computing capital gains—this curbs tax avoidance through undervalued share transfers.
2. Rules:
• Rule 11UA – It prescribes the method for determining the fair market value (FMV) of assets, especially for taxation under Section 56(2)(x). It provides specific valuation formulas for shares, securities, and other properties to compute taxable income in case of gifts or undervalued transfers.
3. SEBI Regulations:
• LODR Regulations, 2015 – It set out disclosure and corporate governance requirements for listed companies to ensure transparency and protect investor interests. They mandate timely and accurate reporting of material events, financials, and other relevant information.
4. FEMA:
• Foreign Exchange Management (Overseas Investment) Rules,2022 – It regulate the outward investment by Indian residents in foreign entities. They provide guidelines on the types of investments, permissible limits, and compliance procedures for Indian companies and individuals investing in foreign assets or subsidiaries.
2. Unquoted Equity Shares
1. Income-tax Act:
• Sections 56(2)(x) – This section taxes money or property (including shares) received without or for inadequate consideration if the value exceeds ₹50,000. The excess amount is treated as income in the hands of the recipient.
• Section 50CA – If shares are transferred for a value lower than FMV (as per Rule 11UA), then FMV is deemed the sale consideration for computing capital gains—this curbs tax avoidance through undervalued share transfers.
2. Rules:
• Rule 11UA – It prescribes the method for determining the fair market value (FMV) of assets, especially for taxation under Section 56(2)(x). It provides specific valuation formulas for shares, securities, and other properties to compute taxable income in case of gifts or undervalued transfers.
3. FEMA:
• Foreign Exchange Management (Overseas Investment) Rules,2022 – It regulate the outward investment by Indian residents in foreign entities. They provide guidelines on the types of investments, permissible limits, and compliance procedures for Indian companies and individuals investing in foreign assets or subsidiaries.
2. Securities Other Than Equity Shares
1. Income-tax Act:
• Section 56(2)(x) – This section taxes money or property (including shares) received without or for inadequate consideration if the value exceeds ₹50,000. The excess amount is treated as income in the hands of the recipient.
2. Rules:
• Rule 11UA – It prescribes the method for determining the fair market value (FMV) of assets, especially for taxation under Section 56(2)(x). It provides specific valuation formulas for shares, securities, and other properties to compute taxable income in case of gifts or undervalued transfers.
3. FEMA:
• Foreign Exchange Management (Overseas Investment) Rules, 2022 – It regulate the outward investment by Indian residents in foreign entities. They provide guidelines on the types of investments, permissible limits, and compliance procedures for Indian companies and individuals investing in foreign assets or subsidiaries.

Valuation of Shares

1. Equity Shares

Quoted Equity Shares: When quoted shares are transferred through a stock exchange, the actual traded price on the date of transfer is considered as the Fair Market Value (FMV). This is accepted by tax authorities as arm’s length since it reflects demand and supply dynamics.

Unquoted Equity Shares: Where shares are not traded on the specific valuation date, Rule 11UA mandates using the lowest price quoted on any recognized exchange on the date of transfer. If not traded on that day, the closest preceding trading date’s price is adopted. This ensures that the FMV is reasonably proxied, even in the absence of live market data

These require more technical valuation under Rule 11UA:

1. Net Asset Value (NAV) Method

The Net Asset Value (NAV) Method is a valuation approach based on the book value of a company’s assets and liabilities. It focuses on the net worth of the company—i.e., what the company owns minus what it owes.

NAV is calculated using the following formula:

FMV per share = ((A + B + C + D – L) / PE) × PV

Where:

• A = Book value or FMV of immovable property (e.g., land, buildings)
• B = FMV of jewelry and artistic works
• C = FMV of shares and securities held by the company
• D = Book value of other assets
• L = Liabilities (excluding reserves, provisions for tax, dividends, etc.)
• PE = Total number of equity shares
• PV = Paid-up value per share

When to Use:

1. Asset-heavy companies such as real estate, investment holding firms, or manufacturing companies with significant physical assets.
2. When the company is not earning significant income, or its profitability doesn’t reflect its true underlying value.
3. Valuing shares in a private limited company, especially for gift taxation or inheritance purposes.
2. Venture Capital or Recent Investment Price Method

The Venture Capital or Recent Investment Price Method is a practical and commercially accepted approach for valuing shares, especially in early-stage or high-growth companies. Though this method is not explicitly listed in Rule 11UA of the Income-tax Rules, it has gained significant acceptance in judicial precedents, FEMA regulations, and professional practice.

When a company receives investment from independent, arm’s length investors such as Venture Capital (VC) firms, Private Equity (PE) investors, or angel investors, the price at which shares are issued to these investors reflects the market-driven, negotiated fair value of those shares.

If such a transaction occurs within a recent time frame (generally within 90 days) before or after the valuation date, that same price can be considered as the Fair Market Value (FMV) for other share transfers or issuances.

2. Securities Other Than Equity Shares

Valuation for instruments like debentures, preference shares, or hybrid securities is governed by their economic characteristics and legal structure. The goal is to derive the FMV as if they were traded in an open market, even when no actual market exists.

1. Preference Shares
   Redeemable preference shares are valued like debt instruments using the DCF method. The expected dividend and redemption amount are discounted to the present. Participating or convertible preference shares may require a blend of DCF and equity-based valuation, especially when they offer upside sharing.
2. Debentures and Bonds
   If listed, their FMV is derived from market trading prices or their YTM (Yield to Maturity). If unlisted, the DCF method is applied based on future coupon flows and principal redemption.
3. Convertible Instruments
   Instruments like CCPS or debentures convertible into equity are valued using hybrid models such as the Black-Scholes or binomial option pricing methods. These consider both the fixed income component and the equity upside, reflecting their dual nature.

Valuation Method to be used:
Discounted Cash Flow (DCF) Method

The Discounted Cash Flow (DCF) Method is a forward-looking valuation technique that estimates the present value of a company based on its expected future cash flows.

 How It Works:

• Forecast free cash flows (FCFs) for a certain number of future years.
• Estimate a terminal value at the end of the forecast period (to capture future cash flows beyond that point).
• Discount all these cash flows back to present value using a discount rate (usually Weighted Average Cost of Capital – WACC).

When to Use:

• Startups and early-stage companies with limited current profits but high future potential.
• Growth-stage businesses where future revenues and margins are expected to improve significantly.
• When issuing shares at a premium, especially to non-residents.
• M&A transactions, investment rounds, or strategic business decisions.

Valuation must be conducted by a Category I Merchant Banker or Chartered Accountant, depending on regulatory requirements and transaction context. For FEMA-related cross-border transfers, merchant banker certification is usually mandatory.

Conclusion

Valuation is no longer just a technical exercise—it’s a regulatory safeguard. Whether you’re executing a family transfer, raising capital, or restructuring ownership, a robust valuation backed by Rule 11UA is critical. It ensures fair pricing, avoids tax pitfalls under Sections 56(2)(x) and 50CA, and supports smooth compliance under FEMA and SEBI. As we delve deeper into specific types of transfers in upcoming blogs, understanding the broader framework outlined here sets the stage for sound, tax-efficient decision-making in share transfers.