Income Tax 2025

Appearance

Special provision for full value of consideration for transfer of share other than quoted share. ​

79(1) ​

If the consideration received or accruing from the transfer of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in the manner as prescribed, the value so determined shall be deemed as the full value of consideration received or accruing as a result of the transfer for the purposes of computing income under the head “Capital gains”.

79(2) ​

The provisions of sub-section (1) shall not apply to any consideration received or accruing as a result of transfer by such class of persons and subject to such conditions, as prescribed.

79(3) ​

In this section, “quoted share” means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.

Explanation

Section Summary: ​

This section addresses the taxation of capital gains arising from the transfer of unquoted shares (shares not listed on a recognized stock exchange). It ensures that the consideration received for such transfers is not undervalued by deeming the fair market value (FMV) of the shares as the full value of consideration for capital gains computation, if the actual consideration is lower than the FMV. This prevents tax evasion through underreporting of transaction values.

Key Changes: ​

  1. Introduction of FMV as Deemed Consideration: If the actual consideration for transferring unquoted shares is less than the FMV, the FMV will be treated as the full value of consideration for capital gains calculation.
  2. Exemptions for Certain Transfers: Sub-section (2) allows the government to prescribe exceptions for specific classes of persons or transactions where this rule will not apply.
  3. Definition of Quoted Shares: Sub-section (3) clarifies that "quoted shares" are those regularly traded on a recognized stock exchange, ensuring that this section applies only to unquoted shares.

Practical Implications: ​

  • Taxpayers Selling Unquoted Shares: Sellers must ensure that the transaction value is not below the FMV, as the FMV will be used for tax purposes if it is higher.
  • Buyers of Unquoted Shares: Buyers may face higher stamp duty or other costs if the transaction is deemed to be at FMV.
  • Compliance Burden: Taxpayers must determine the FMV of unquoted shares using prescribed methods, which may require valuation reports from registered valuers.
  • Exempt Transactions: Certain transactions (e.g., transfers to family members or under specific conditions) may be exempt, reducing compliance complexity for eligible taxpayers.

Critical Concepts: ​

  • Fair Market Value (FMV): The price the share would fetch in an open market transaction between willing buyers and sellers. The method for determining FMV will be prescribed by the government.
  • Quoted vs. Unquoted Shares: Quoted shares are those listed and regularly traded on a recognized stock exchange, while unquoted shares are not.
  • Deemed Consideration: Even if the actual transaction value is lower, the FMV will be considered for tax purposes.

Compliance Steps: ​

  1. Determine FMV: Use the prescribed method to calculate the FMV of unquoted shares being transferred.
  2. Compare Transaction Value: Ensure the actual consideration is not lower than the FMV. If it is, use the FMV for capital gains computation.
  3. Maintain Documentation: Keep records of the valuation report and transaction details to substantiate the FMV and consideration.
  4. Check for Exemptions: Verify if the transaction qualifies for exemptions under sub-section (2).

Examples: ​

  • Scenario 1: Mr. A sells unquoted shares of XYZ Pvt. Ltd. to Mr. B for ₹10 lakh. The FMV of the shares, as per the prescribed method, is ₹15 lakh. Since the transaction value is lower than the FMV, ₹15 lakh will be deemed as the full value of consideration for capital gains calculation.
  • Scenario 2: Ms. C transfers unquoted shares to her daughter as a gift. If such transfers are exempt under sub-section (2), the FMV rule will not apply, and the actual consideration (if any) will be used for tax purposes.

This section ensures fair taxation of capital gains from unquoted shares while providing flexibility for certain exempt transactions.