Last reviewed: 25 September 2026. Every private share deal in India now runs into a valuation question. Buy unquoted shares cheap and Section 56(2)(x) taxes you on the discount; sell them cheap and Section 50CA taxes the seller on value never received; bring in a foreign investor and FEMA pricing rules set a price floor; allot preferentially and the Companies Act demands a registered valuer. Angel tax is gone, but pricing discipline is very much alive. This guide maps who is taxed, at what value, and which professional must sign which report. The 1961 Act sections are used for FY 2025-26 transactions; the Income-tax Act, 2025 equivalents for transactions from 1 April 2026 are mapped in a table below.
Where the valuation provisions bite: the four touchpoints
Four different people can be taxed, or blocked, around the same share transaction. The starting point is knowing which provision looks at whom:
| Situation | Who is affected | Provision (1961 Act) | Valuation anchor |
|---|---|---|---|
| Shares received without consideration or below FMV | Recipient, taxed as income from other sources | Section 56(2)(x) | Rule 11UA FMV on receipt date |
| Unquoted shares transferred below FMV | Seller, capital gains recomputed on FMV | Section 50CA | Rule 11UAA FMV on transfer date |
| Company issuing shares above FMV to residents/non-residents | Issuing company, no longer taxed | 56(2)(viib), abolished from AY 2025-26 | Not applicable |
| ESOP exercise (unlisted employer) | Employee: salary perquisite; employer deducts TDS | Section 17(2)(vi) read with Rule 3(8) | Category-I merchant banker FMV on the specified date |
The ₹50,000 thresholds under Section 56(2)(x)
| Receipt | When taxable | Amount taxed |
|---|---|---|
| Money without consideration | Aggregate in the year exceeds ₹50,000 | The whole sum received |
| Immovable property, without consideration | Stamp duty value exceeds ₹50,000 | Entire stamp duty value |
| Immovable property, inadequate consideration | Stamp duty value exceeds price by more than the higher of ₹50,000 and 10% of consideration | Stamp duty value minus consideration |
| Shares, securities, jewellery and other specified movable property, without consideration | Aggregate FMV exceeds ₹50,000 | Entire aggregate FMV |
| Specified movable property, inadequate consideration | Aggregate FMV exceeds price paid by more than ₹50,000 | Entire difference (FMV − consideration) |
Note the asymmetry: the 10% tolerance band softens only immovable property deals. Share transactions get no percentage cushion: one rupee past the ₹50,000 aggregate line and the whole difference is taxable. Receipts from relatives, on marriage, under a will or inheritance, in contemplation of death, from local authorities, from registered charitable institutions, and shares received under qualifying amalgamations or demergers stay exempt.
How unquoted equity shares are valued: the Rule 11UA NAV formula
For Section 56(2)(x), the FMV of unquoted equity shares is a prescribed net asset value, not book NAV. The balance sheet is re-marked for four asset classes:
FMV = (A + B + C + D − L) × PV ÷ PE
A = book value of remaining assets (net of income-tax refunds/advance tax adjustments) · B = jewellery and artistic work at FMV · C = shares and securities held, at their FMV · D = immovable property at stamp duty value · L = book liabilities excluding paid-up capital, reserves and surplus, and certain provisions/contingent items · PV = paid-up value of the shares being valued · PE = total paid-up equity capital.
Worked example. Sharda Components Pvt Ltd has a balance sheet total of ₹2.50 crore: other assets ₹1.80 crore, investments carried at ₹30 lakh (market value ₹55 lakh) and a small office carried at ₹40 lakh (stamp duty value ₹90 lakh). Liabilities: borrowings ₹1.00 crore and trade payables ₹25 lakh; paid-up capital ₹10 lakh (1,00,000 shares of ₹10) and reserves ₹1.15 crore.
| Step | Computation | Value |
|---|---|---|
| A: other assets | Book value | ₹1,80,00,000 |
| C: shares/securities held | Marked to FMV | ₹55,00,000 |
| D: immovable property | Stamp duty value | ₹90,00,000 |
| L: liabilities | Borrowings + trade payables | ₹1,25,00,000 |
| Net | A + C + D − L | ₹2,00,00,000 |
| FMV per share | ₹2,00,00,000 × 10 ÷ 10,00,000 | ₹200 |
Plain book NAV is ₹125 per share; the substitution of market values lifts the tax FMV to ₹200. A buyer who pays ₹125 "because that is what the balance sheet shows" picks up ₹75 per share of taxable income under Section 56(2)(x). Quoted shares bought through the exchange are taken at transaction value; off-market, the lowest quoted price on the valuation date applies. Unquoted preference shares and other securities go by the price they would fetch in the open market, supported by a valuation report.
Selling below FMV: Section 50CA taxes the seller on the same gap
Example. Meera sells 10,000 unquoted equity shares (Rule 11UA FMV ₹100 each) to her friend Rohan at ₹60. Two assessments follow from one price:
- Rohan (buyer): difference of ₹4,00,000 (10,000 × ₹40) exceeds ₹50,000, so the full ₹4,00,000 is taxed at his slab as income from other sources. His cost of acquisition steps up to the value considered, ₹10,00,000, under Section 49(4).
- Meera (seller): Section 50CA substitutes ₹10,00,000 as her sale consideration even though she received ₹6,00,000, and capital gains are computed on the higher figure.
The same ₹4 lakh discount is effectively taxed twice, once in each party's hands. Pricing the deal at the Rule 11UA value, with a dated valuation working on file, avoids both hits. And a nuance the tribunals have carved out on the receipt side: proportionate rights issues and bonus issues are generally outside Section 56(2)(x), while disproportionate allotments that shift value between shareholders can be examined; evaluate the position before relying on it.
Angel tax is gone; the valuation reports are not
Section 56(2)(viib), which taxed companies on share premium above FMV, stands abolished from AY 2025-26 by the Finance (No. 2) Act, 2024. What continues, and is routinely missed:
| Purpose | Governing provision | Who values |
|---|---|---|
| Buyer/seller tax on unquoted shares: 56(2)(x) and 50CA | Rule 11UA(1) / Rule 11UAA | Formula-driven NAV; keep a CA-certified working. Non-equity securities need an open-market value report |
| Issue or transfer of shares involving a non-resident | FEMA: Rule 21, NDI Rules, 2019 | Practising CA, SEBI Category-I merchant banker or practising cost accountant; internationally accepted methodology at arm's length |
| Preferential allotment / private placement pricing | Section 62(1)(c), Companies Act 2013 read with Rule 13 | IBBI-registered valuer (Section 247) |
| ESOP perquisite on exercise (unlisted company) | Rule 3(8), Income-tax Rules | SEBI Category-I merchant banker, as on the exercise date or a date within the preceding 180 days |
On FEMA pricing the direction matters: an issue or a resident-to-non-resident transfer must happen at or above the certified fair value, while a non-resident selling to a resident must exit at or below it, with no assured-return exit price. FC-GPR (30 days from allotment) and FC-TRS (60 days from transfer) filings lean on this certificate. One funding round can therefore legitimately need two documents: a registered valuer report for the Companies Act offer letter and a CA/merchant banker certificate for FEMA, dated close to the transaction and telling one consistent value story. The same pricing rules reach downstream investment: when a foreign-owned and controlled Indian company (FOCC) invests in another Indian company, that investment counts as indirect foreign investment and must meet the FDI pricing guidelines too. A foreign investor coming in will also need the company's annual FLA return and FEMA reporting kept current; our foreign subsidiary accounting and FEMA service handles that alongside the valuation. For option pools, the employer-side mechanics sit alongside this; see our ESOP valuation advisory and the allotment paperwork covered under share allotment & ROC funding compliance.
From FY 2026-27: the Income-tax Act, 2025 mapping
| 1961 Act reference | Position from tax year 2026-27 |
|---|---|
| Section 56(2)(x): property received without/for inadequate consideration | Section 92(2)(m), Income-tax Act, 2025: same ₹50,000 thresholds and 10% immovable-property tolerance |
| Exemptions (relatives, marriage, will, reorganisations) | Section 92(3) |
| Section 50CA deeming for sellers | Section 79 |
| Section 49(4): cost step-up where value was taxed under 56(2)(x) | Section 73, Table S.No. 17 |
| Section 17(2)(vi): ESOP perquisite | Section 17(1)(d) |
| Rule 11UA valuation mechanics | Prescribed FMV rule under the Income-tax Rules, 2026; rule number to be confirmed before citing |
Returns for FY 2025-26 (AY 2026-27) remain fully under the 1961 Act. The non-audit due date (31 August 2026) has passed; belated returns are open until 31 December 2026. So 56(2)(x), 50CA and Rule 11UA are the operative citations for everything being filed and assessed now. For transactions from 1 April 2026, quote the 2025-Act references and confirm the finally notified rule text before filing. If a below-FMV purchase shows up in your AIS or a notice asks for your valuation basis, respond with the dated working; see how we handle these in ITR-U and updated-return situations and capital gains on shares and mutual funds.
Checklist before you sign a share issue or transfer
- Fix the valuation date close to the transaction date; stale numbers invite questions.
- Identify every law triggered: buyer-side 56(2)(x), seller-side 50CA, FEMA Rule 21, Companies Act Rule 13, ESOP Rule 3(8).
- Match the valuer to the law: CA working for Rule 11UA NAV, CA/merchant banker/cost accountant for FEMA, IBBI-registered valuer for preferential allotments, merchant banker for ESOP perquisites.
- Re-mark the balance sheet: investments at FMV, immovable property at stamp duty value, never plain book NAV.
- Price at or around the supported FMV, or document commercial reasons and accept the computed tax cost consciously.
- File FC-GPR within 30 days of allotment / FC-TRS within 60 days of transfer where a non-resident is involved.
- Disclose correctly in the ITR (unlisted shareholding schedule) and preserve the working papers for scrutiny.
Common mistakes we see in practice
- Using book NAV without substituting stamp duty value and investment FMVs, which understates Rule 11UA value.
- Transfers between friends or business associates at face value, assuming "no profit, no tax": 56(2)(x) taxes the recipient anyway.
- Reusing one valuation across laws and dates without checking whether that law prescribes a different valuer or method.
- Assuming DPIIT recognition still shields pricing: the startup exemption belonged to the abolished 56(2)(viib), not to buyer-side 56(2)(x).
- Missing the Section 49(4) step-up on a later sale and paying tax on the same gap twice.
- Signing SH-4 first and looking for the valuation later: the FMV must exist on the transaction date, not after the notice arrives.
Frequently asked questions
Do I pay tax if my father gifts me shares of his private company?
No. Receipts from a "relative" (which includes parents) are exempt under Section 56(2)(x), and under Section 92(3) of the Income-tax Act, 2025 from tax year 2026-27. Execute a gift deed and keep the share transfer paperwork; when you later sell, your cost and holding period are taken from the previous owner.
I bought unquoted shares below their Rule 11UA value. When is the difference taxable?
If the aggregate fair market value of all such properties received in the year exceeds the price you paid by more than ₹50,000, the entire difference is taxed in your hands as income from other sources at your slab rate. The value taxed is then treated as your cost of acquisition under Section 49(4) (section 73, Table S.No. 17 of the 2025 Act from tax year 2026-27), so the same gap is not taxed again on a future sale.
Is angel tax still applicable in 2026?
No. Section 56(2)(viib) was abolished by the Finance (No. 2) Act, 2024 with effect from AY 2025-26, so share premium on issues from FY 2024-25 onwards is not taxed under that clause, and the 2025 Act has no equivalent. However, FEMA pricing certification, Companies Act registered-valuer pricing for preferential allotments, and buyer-side taxation (Section 56(2)(x), now Section 92(2)(m)) all continue to apply.
Does the 10% tolerance band apply to share transactions?
No. The higher-of-₹50,000-or-10%-of-consideration tolerance applies only to immovable property. For shares and other movable property there is no percentage tolerance, only the ₹50,000 aggregate threshold, beyond which the whole difference becomes taxable.
Who can sign the valuation for a FEMA share issue or transfer?
Under Rule 21 of the NDI Rules, 2019, a practising Chartered Accountant, a SEBI-registered Category-I merchant banker or a practising cost accountant can certify the fair value using an internationally accepted pricing methodology on an arm's-length basis. A preferential allotment under the Companies Act separately needs a report from an IBBI-registered valuer.
What changes under the Income-tax Act, 2025?
From tax year 2026-27, the Section 56(2)(x) scheme continues as Section 92(2)(m), with the exemption list in Section 92(3); Section 50CA becomes Section 79; the Section 49(4) cost step-up becomes section 73, Table S.No. 17; and the ESOP perquisite in Section 17(2)(vi) becomes Section 17(1)(d). Fair market value will be determined under the rule that replaces Rule 11UA in the Income-tax Rules, 2026; confirm the rule number before citing it. Returns for FY 2025-26 (AY 2026-27) remain under the 1961 Act.
Do FEMA pricing rules apply when a foreign-owned Indian company invests in another Indian company?
Yes. An Indian company that has foreign investment and is not owned and controlled by resident Indian citizens is treated as a foreign-owned and controlled company. Its downstream investment counts as indirect foreign investment and must follow the same entry route, sectoral caps and pricing guidelines as direct foreign investment, so the fair-value certificate under the NDI Rules is needed, and the investment is reported to the RBI through the prescribed form.
Somesh Chandak & Associates prepares Rule 11UA workings, FEMA pricing certificates and fundraising valuation support for private companies, founders and investors, dated and documented for scrutiny.
Startup & Rule 11UA Valuations FEMA Share Valuation Talk to usDisclaimer: This article is for general information for FY 2025-26 / FY 2026-27 as on 25 September 2026 and is not professional advice or a solicitation. Thresholds, rules and forms under the Income-tax Act, 2025 and the Income-tax Rules, 2026 are being operationalised progressively; please verify the current position or consult a professional before acting on a specific transaction.