Shares to employees of closely held limited company

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Ravi Sharma (Querist)
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23 November 2011 A company is a closely held company in existence of business for a decade planning to issue fresh shares to its employees. The scheme is made to issue the shares at par @ Rs.10/- each.

Can you please guide me about the income tax implications for the Company and the employees?

CA Ayush Agarwal

CA Ayush Agarwal (Expert)
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23 November 2011 No Implication in Hand of Company.

Employees When Sale Then Take Issued Price as COA

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Ravi Sharma

Ravi Sharma (Querist)
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23 November 2011 Thanks for the prompt response, Mr. Ayush.

Do any other expert have a different view on the topic?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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25 July 2025 This is an important question with real tax consequences for both the closely held company and its employees, especially when fresh shares are issued at par (₹10 each).

Let’s break it down from an Income Tax perspective, updated with relevant provisions and practical implications:

✅ Situation:
A closely held private company (unlisted) is issuing fresh shares to employees at par value (₹10).

The fair market value (FMV) of the shares may be higher than ₹10, depending on the company’s valuation.

The shares are not issued under a formal ESOP plan.

✅ Tax Implications
🔹 1. For the Employee:
Under Section 17(2)(vi) of the Income Tax Act, 1961, if:

A closely held company allots shares or securities to an employee at a price below FMV, then

The difference between FMV and issue price is treated as a perquisite and taxed as salary income.

⚠️ So in your case:
If FMV > ₹10, then:

Perquisite = FMV – ₹10 × No. of shares allotted

This perquisite value is taxable in the year of allotment.

🔹 How is FMV Determined?
For unlisted shares, Rule 3(8) of the Income Tax Rules says:

FMV should be determined by a merchant banker or CA qualified to do valuation as per the Discounted Cash Flow (DCF) method or Net Asset Value (NAV) method.

🔹 2. For the Company:
No tax implications for issuing shares at par.

However, the perquisite value must be accounted for under TDS obligations on salary.

The company must deduct TDS on the value of the perquisite (FMV – ₹10), just like any other salary component.

Failure to deduct TDS may attract penalties and disallowance under Section 40(a)(ia).

🔹 3. On Sale of Shares by Employee:
When the employee sells the shares later, capital gains tax applies.

Cost of Acquisition (COA) = FMV considered for perquisite (not ₹10)

Capital Gain = Sale Price – FMV (at time of allotment)

Depending on holding period:

> 24 months = Long-Term Capital Gains (LTCG), taxed @ 20% with indexation

≤ 24 months = Short-Term Capital Gains (STCG), taxed at slab rate

✅ Summary Table:
Aspect Taxable? Who is taxed? Section Notes
Issue of shares at par ❌ — — No tax for company
Allotment below FMV ✅ Employee 17(2)(vi) Taxed as perquisite
TDS on perquisite ✅ Company 192 Deduct at time of allotment
Sale of shares ✅ Employee 45, 48, 2(42A) COA = FMV at allotment

✅ Practical Tip:
If the company wants to avoid triggering perquisite tax, they may:

Get a conservative FMV valuation from a registered valuer or merchant banker

Consider issuing shares under an approved ESOP plan, which provides clearer structure and compliance

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