Section 56(2) of the it act
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
22 August 2013
Dear Experts,
my client is a PVT Ltd company. and want to issue the equity share to the directors at a premium of Rs. 80/- per share.
face value is 10/- per share
book value is 90/- per share
Can you please advise whether tax u/s 56(2) will applicable on Rs.80/- ?
Regards,
Vijay Jain
my client is a PVT Ltd company. and want to issue the equity share to the directors at a premium of Rs. 80/- per share.
face value is 10/- per share
book value is 90/- per share
Can you please advise whether tax u/s 56(2) will applicable on Rs.80/- ?
Regards,
Vijay Jain
22 August 2013
In my view Section 56(2) (vii)(c)(ii) would apply to the Director on the difference between the FMV and consideration .(90-80=10)
Querist : Anonymous
Querist :
Anonymous
(Querist)
23 August 2013
Thanks,
can you please tell the method to calculate FMV ?
Vijay
can you please tell the method to calculate FMV ?
Vijay
23 July 2025
Great question, Vijay. You’re referring to the applicability of **Section 56(2)** of the **Income Tax Act** on the **issue of shares by a private limited company to directors at a premium**.
Let’s break it down clearly for you.
---
## 🔍 **Which Clause Applies Here?**
Since the **recipient is an individual (the director)** and the **company is issuing shares at a value lower than FMV**, the relevant clause is:
> **Section 56(2)(vii)** (for years prior to **1 April 2017**)
Or
> **Section 56(2)(x)** (for **transactions after 1 April 2017** — both clauses are materially similar)
---
## ✅ **Applicability in Your Case**
You said:
* Company: **Pvt Ltd**
* Face value: ₹10
* Premium: ₹80 → Issue price = ₹90 per share
* Book value / FMV = ₹90
* Shares issued to: **Directors (Individuals)**
If:
* The **issue price = ₹90**, and
* **FMV = ₹90**
👉 Then **no tax is applicable under Section 56(2)(x)**, because the shares are being issued **at FMV**.
### BUT...
If the company **issues shares at ₹80 (below FMV of ₹90)**, then:
➡️ The **difference of ₹10** (i.e., ₹90 - ₹80) **will be taxable in the hands of the director** as **“Income from Other Sources” under Section 56(2)(x)**, if:
> "...any property (including shares) is received for a consideration which is **less than FMV** by an amount exceeding ₹50,000..."
---
## 🧮 **How to Determine FMV of Unquoted Equity Shares**
As per **Rule 11UA(1)(c)** of the **Income Tax Rules**, FMV of **unquoted equity shares** is calculated using this formula:
> **FMV = (A – L) / PE × PV**
Where:
* **A** = Book value of assets (excluding certain items)
* **L** = Book value of liabilities (excluding equity & related items)
* **PE** = Total paid-up equity share capital
* **PV** = Paid-up value of share being valued
This is effectively the **Net Asset Value (NAV) method** — i.e., **book value per share** based on balance sheet.
---
## ✅ Summary Answer:
| Question | Answer |
| ------------------------------- | ----------------------------------------------------------------------- |
| Is Section 56(2)(x) applicable? | ✅ Yes, **if shares are issued below FMV** |
| What is taxable? | The **difference between FMV and issue price** (if > ₹50,000 aggregate) |
| FMV Calculation | As per **Rule 11UA(1)(c)** using **NAV method** |
| If issued at FMV (₹90)? | ❌ **No tax liability** |
---
## 💡 Suggestions:
* If possible, **issue shares at FMV** (₹90) to avoid tax exposure.
* Keep documentation ready (audited balance sheet, valuation report if required).
* If discount is offered, **consider tax impact in the hands of the director**.
Let me know if you’d like help preparing a **valuation working** under Rule 11UA or a draft **board/shareholder resolution**.
Let’s break it down clearly for you.
---
## 🔍 **Which Clause Applies Here?**
Since the **recipient is an individual (the director)** and the **company is issuing shares at a value lower than FMV**, the relevant clause is:
> **Section 56(2)(vii)** (for years prior to **1 April 2017**)
Or
> **Section 56(2)(x)** (for **transactions after 1 April 2017** — both clauses are materially similar)
---
## ✅ **Applicability in Your Case**
You said:
* Company: **Pvt Ltd**
* Face value: ₹10
* Premium: ₹80 → Issue price = ₹90 per share
* Book value / FMV = ₹90
* Shares issued to: **Directors (Individuals)**
If:
* The **issue price = ₹90**, and
* **FMV = ₹90**
👉 Then **no tax is applicable under Section 56(2)(x)**, because the shares are being issued **at FMV**.
### BUT...
If the company **issues shares at ₹80 (below FMV of ₹90)**, then:
➡️ The **difference of ₹10** (i.e., ₹90 - ₹80) **will be taxable in the hands of the director** as **“Income from Other Sources” under Section 56(2)(x)**, if:
> "...any property (including shares) is received for a consideration which is **less than FMV** by an amount exceeding ₹50,000..."
---
## 🧮 **How to Determine FMV of Unquoted Equity Shares**
As per **Rule 11UA(1)(c)** of the **Income Tax Rules**, FMV of **unquoted equity shares** is calculated using this formula:
> **FMV = (A – L) / PE × PV**
Where:
* **A** = Book value of assets (excluding certain items)
* **L** = Book value of liabilities (excluding equity & related items)
* **PE** = Total paid-up equity share capital
* **PV** = Paid-up value of share being valued
This is effectively the **Net Asset Value (NAV) method** — i.e., **book value per share** based on balance sheet.
---
## ✅ Summary Answer:
| Question | Answer |
| ------------------------------- | ----------------------------------------------------------------------- |
| Is Section 56(2)(x) applicable? | ✅ Yes, **if shares are issued below FMV** |
| What is taxable? | The **difference between FMV and issue price** (if > ₹50,000 aggregate) |
| FMV Calculation | As per **Rule 11UA(1)(c)** using **NAV method** |
| If issued at FMV (₹90)? | ❌ **No tax liability** |
---
## 💡 Suggestions:
* If possible, **issue shares at FMV** (₹90) to avoid tax exposure.
* Keep documentation ready (audited balance sheet, valuation report if required).
* If discount is offered, **consider tax impact in the hands of the director**.
Let me know if you’d like help preparing a **valuation working** under Rule 11UA or a draft **board/shareholder resolution**.
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