Issues of Shares at a Premium - Tax Implications



Quick Summary
Issuing shares at a value higher than their face value is known as an issue at a premium. This often occurs when a company has built strong goodwill and reputation. However, under Section 56(2)(viib) of the Income Tax Act, the excess amount received over the Fair Market Value (FMV) is typically taxed as the company's income, unless the company is a registered startup or meets specific exemption criteria. A merchant banker is responsible for determining the FMV of these shares.

When Shares are issued at a value more than the Face Value, then it is called Issue of Shares at a Premium

Why Premium?

Over a period of time, the company has established its Goodwill, Reputation, Brands etc.

Issue of Equity Shares at Premium attracts Section 56(2)(viib) of the Income Tax Act unless it’s a Start-up registered under DPIIT.

As per Section 56(2)(viib) of Income Tax Act – if Company issues shares at a premium or consideration in excess of the FMV (Fair Market Value) then such Excess is treated as the Income of the Company and liable to taxed under the Head ‘Income from Other Sources'. E.g. if Face Value of a Share is Rs. 100, FMV is Rs. 110 and Shares are issued at Rs. 120 then this excess of Rs. 10 (Issue Price of 120 -  FMV of Rs. 110) would be liable to tax.

Shares at a Premium: Tax Implications Explained

Only Merchant Banker is authorized to determine the FMV of such Equity shares.

The above provisions on valuation of shares would not apply in case consideration for issue of shares is received

 

By a Venture Capital Undertaking (VCU) from a Venture Capital Fund (VCF) or Venture Capital Company (VCC) or by a company from a class or classes of persons as notified by the Central Government for this purpose

This would mean that in above two cases, the Company can issue equity shares at a price which is higher than FMV and excess consideration received will not be regarded as income of the company.

 

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About the Author

Chartered Accountant

Proprietor, Aditya Goel Co, Chartered Accountantssince July 2020. Providing Income Tax, GST, Book Keeping Accounts, MIS, Company Incorporation, ROC andAdvisory services. Having ~9 years of experience into Corporate Finance with organisations like Barclays, Wipro Genpact. CA. Aditya Goel B.Com (H), FC ... Read more

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