Understanding Valuation Rules for Share Transfers (Post Angel Tax Removal)
Written By
Treelife
Share
-
Link copied to clipboard!https://treelife.in/compliance/understanding-valuation-rules-for-share-transfers-post-angel-tax-removal/
-
-
-
-
AI Summary
- Section 56(2)(viib) of the Income Tax Act, known as Angel Tax, has been removed, easing compliance for startup funding and share transfers.
- Primary share issuance involves new shares issued by a company to raise funds, while secondary transfer involves the sale of existing shares between investors.
- Primary share issuance requires a Registered Valuer report under Section 62 of the Companies Act 2013 for preferential allotment.
- Secondary share transfers do not require a Registered Valuer report, but the fair market value must still be justified.
- Rule 21 of the FEMA (Non-Debt Instruments) Rules 2019 requires that the price be at or above fair market value when foreign investors subscribe to fresh shares.
- Rule 21 of the FEMA (Non-Debt Instruments) Rules 2019 also requires that the transfer price not be below fair market value when existing shares are sold to a non-resident.
- Fair market value for tax purposes is determined under Rule 11UA of the Income Tax Rules, using methods such as Net Asset Value, Discounted Cash Flow, and other internationally accepted approaches.
- Capital gains tax applies on the sale of shares, with short-term capital gains taxed at 20 percent for holding periods under 24 months and long-term capital gains taxed at 12.5 percent for holding periods of 24 months or more, both plus applicable surcharge and cess.
- With Angel Tax removed, businesses should still ensure valuation compliance under the Companies Act 2013, the FEMA Non-Debt Instruments Rules 2019, and the Income Tax Act to avoid regulatory scrutiny.
Blog Content Overview
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.
| 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 |
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.
About the Author
Share
-
Link copied to clipboard!https://treelife.in/compliance/understanding-valuation-rules-for-share-transfers-post-angel-tax-removal/
-
-
-
-
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.
We Are Problem Solvers. And Take Accountability.
Related Posts
Ind AS 115 Revenue Recognition for SaaS and Subscription Businesses
Revenue recognition is where SaaS accounting gets genuinely hard. A customer pays ₹12 lakh upfront for an annual subscription in...
Learn More
BharatPe-Ashneer Grover SHA saga: what actually happened and the lessons for founders
BharatPe's shareholders agreement contained the same clauses that sit in almost every Indian venture-backed SHA: restricted shares, a for-cause clawback,...
Learn More
SaaS Metrics Investors Track: The Complete Guide & Latest Benchmarks
Every SaaS investor enters a diligence process with the same underlying question: is this business genuinely compounding, or does it...
Learn More
© 2026 Treelife Ventures Services Private Limited. All Rights Reserved.