Sale of share in pvt ltd- fema and income tax

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Querist : Anonymous

Querist : Anonymous (Querist)

23 June 2014 Hi,
we have to transfer shares held by the resident individuals in a private limited company to a foreign company. Can any one advise on the income tax and FEMA angles what precautions to be taken. Also need advise whether the valuation under FEMA as per DCF should also be used for Income tax valuation of the shares.

Querist : Anonymous

Querist : Anonymous (Querist)

10 September 2014 I need this info too

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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23 July 2025 Great question! Selling shares of a private limited company by resident individuals to a foreign company involves important compliance under both **FEMA** and **Income Tax** laws. Here's a clear rundown of key points and precautions:

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### 1. **FEMA (Foreign Exchange Management Act) Considerations**

* **Transfer of shares by resident individuals to a foreign company** is considered an **outbound investment** or **capital account transaction**.
* Such transfers require compliance with **RBI regulations**, specifically under the **Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000**.
* Usually, **prior approval of RBI** or compliance with the **Liberalized Remittance Scheme (LRS)** (up to USD 250,000 per financial year) is required.
* The **valuation of shares** for FEMA purposes should follow **Fair Market Value (FMV)** norms as per **Discounted Cash Flow (DCF)** or other internationally accepted valuation methods.
* Ensure proper documentation and **file Form FC-TRS** (Foreign Currency Transfer of Shares) within 60 days of transfer with the RBI.

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### 2. **Income Tax Implications**

* **Capital Gains Tax** arises on transfer of shares by resident individuals.
* The gain = **Sale consideration - Cost of acquisition**.
* If shares are held for more than 24 months, **Long-Term Capital Gains (LTCG)** applies; otherwise, **Short-Term Capital Gains (STCG)** applies.
* For **unlisted shares**, the **fair market value (FMV)** for income tax purposes is determined by the **valuation rules under Rule 11UA/11UB**, which often uses methods like **DCF**.
* So, **valuation for income tax purposes is independent but often aligns with DCF valuation** used for FEMA.
* Ensure proper **TDS (Tax Deducted at Source)** compliance under Section 195 on payment to the foreign company.
* Report the transaction in **Income Tax Return** under capital gains and disclose as per Form 3CD/Annual Information Return if applicable.

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### 3. **Precautions**

* Get a **professional valuation report** prepared by a certified valuer using DCF or other accepted methods.
* Maintain **documentation** of RBI/FEMA approvals or compliance with LRS.
* File **Form FC-TRS** timely with RBI.
* Ensure correct **TDS deduction and deposit** to avoid penalties.
* File **income tax returns** reporting the transaction fully.
* Consider **Double Taxation Avoidance Agreement (DTAA)** if applicable, for any tax credit.

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### Summary Table:

| Aspect | FEMA Compliance | Income Tax Compliance |
| --------- | --------------------------------------- | ----------------------------------------- |
| Approval | RBI approval or LRS compliance | N/A |
| Valuation | DCF or internationally accepted methods | FMV under Rule 11UA/11UB, often DCF-based |
| Reporting | File Form FC-TRS within 60 days | Report capital gains and TDS in ITR |
| Tax | N/A | Capital Gains Tax (LTCG/STCG) |
| TDS | N/A | Deduct TDS under Section 195 |

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If you want, I can help you draft a checklist or guide for documentation, or assist with preparing valuation notes or tax computations. Would that help?

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