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Understanding Valuation Rules for Share Transfers (Post Angel Tax Removal)

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Treelife

Published on

June 20,
2025

Last updated on

June 20, 2025
15:57

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https://treelife.in/compliance/understanding-valuation-rules-for-share-transfers-post-angel-tax-removal/

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1 Primary vs Secondary Share Transfers: What’s the Difference?
2 Key Compliance Overview
3 Need Help Navigating Share Transfer Valuation Rules?

With the removal of Section 56(2)(viib), commonly known as Angel Tax, the landscape for startup funding and share transfers has significantly evolved. This update brings relief but also re-emphasizes the importance of complying with valuation norms under various regulatory frameworks. Here’s a simplified yet comprehensive guide to the valuation rules applicable for both primary and secondary share transfers in India.

Primary vs Secondary Share Transfers: What’s the Difference?

Aspect	Primary Share Issuance	Secondary Share Transfer
What it means	New shares issued by a company to raise funds	Sale of existing shares between investors
Key Compliance	Governed by Companies Act, FEMA, and Income Tax Act	Governed by FEMA and Income Tax Act
Valuation Requirement	Registered Valuer (RV) report mandatory	No RV required, but FMV must be justified

Key Compliance Overview

Aspect	Primary Share Issuance (Fresh Issue by Company)	Secondary Transfer (Sale of Existing Shares)
Companies Act Compliance	Section 62 of Companies Act, 2013 – Valuation by Registered Valuer (RV) for preferential allotment	No RV requirement for private transfers, but FMV should be maintained
FEMA Compliance	Rule 21 of FEMA (Non-Debt Instruments) Rules, 2019 – Price must be at or above FMV for foreign investors	Rule 21 of FEMA (Non-Debt Instruments) Rules, 2019 – Price cannot be below FMV when transferring to a non-resident
Income Tax Compliance	FMV determined as per Rule 11UA (NAV, DCF, and internationally accepted methods)	FMV as per Rule 11UA; Capital Gains Tax applies (Short-Term or Long-Term)
Valuation Method	Registered Valuer Report based on: – Discounted Cash Flow (DCF): Projects future cash flows and discounts them to present value. – Net Asset Value (NAV): Determines share value based on net assets of the company. – Market Price Method: Applicable if shares are listed on a recognized stock exchange.	FMV based on: – Rule 11UA Methods: Includes NAV, DCF, Comparable Company Multiple, Option Pricing Method, and other internationally accepted methods.
Fair Market Value (FMV)	FMV is based on Registered Valuer Report as per Companies Act and FEMA	FMV is based on transaction price, Rule 11UA, and FEMA guidelines
Taxation	No Angel Tax post Section 56(2)(viib) removalFuture sales attract capital gains tax	Capital Gains Tax: – Short-term (STCG) @20%* if held < 24 months – Long-term (LTCG) @12.5%* if held ≥ 24 months (Indexation available)*plus applicable surcharge and cess

Need Help Navigating Share Transfer Valuation Rules?

With the removal of Angel Tax, the rules around share transfers have evolved. If you’re unsure about how to value shares or ensure compliance with the latest regulatory frameworks, our experts are here to guide you. Get in touch with us today to navigate the complexities of share transfer valuation and stay compliant with the latest tax regulations.

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About the Author

Treelife

Treelife Team | support@treelife.in

We are a legal and finance firm with a deep focus on the startup ecosystem. We offer a wide range of services, including Virtual CFO, Legal Support, Tax & Regulatory, and Global Expansion assistance.

Our goal at Treelife is to provide you with peace of mind and ease in business.