Valuation of shares
This query is : Resolved
07 March 2014
A promoter of a private limited company wants to transfer his share to another person.
The face value of share is Rs. 10 and the number of shares is 1,00,000 shares.
How to compute the value of shares to be transferred and on what date should the shares be valued. whether it is on the date of transfer or on the last balance sheet date.
The face value of share is Rs. 10 and the number of shares is 1,00,000 shares.
How to compute the value of shares to be transferred and on what date should the shares be valued. whether it is on the date of transfer or on the last balance sheet date.
08 March 2014
Hi,
Valuation of shares is made on DCF basis, i.e. on the basis of projections for coming years.
If, it is resident to resident transfer, then price may be the valuation price or lower (not lower than face value)and if it is non-resident transfer, then price shall be valuation price or higher.
Valuation of shares is made on DCF basis, i.e. on the basis of projections for coming years.
If, it is resident to resident transfer, then price may be the valuation price or lower (not lower than face value)and if it is non-resident transfer, then price shall be valuation price or higher.
08 March 2014
Sir if the transfer of shares is at more than the fair value then what are the provisions in Income Tax.
Suppose the Fair value is Rs.5/share and the shares are transferred at Rs. 11/share. Then what are the provisions under income tax.
Suppose the Fair value is Rs.5/share and the shares are transferred at Rs. 11/share. Then what are the provisions under income tax.
02 August 2025
Great question! Here’s how the valuation and tax treatment for share transfer usually works:
---
### 1. **Valuation of Shares for Transfer**
* **Method:** Generally, shares of a private limited company are valued using methods like:
* **DCF (Discounted Cash Flow) method**, or
* **Net Asset Value (NAV)**, or
* **Comparable market price method**, etc.
* The **fair value** of shares is typically computed based on the **last audited financials** and future earning projections.
* The **date of valuation** is usually:
* The **date of transfer** of shares, OR
* The **latest balance sheet date** (financial statements) preceding the date of transfer.
In practice, valuation is often done on the last audited balance sheet date for ease, unless there is a significant change requiring fresh valuation.
---
### 2. **Transfer Price Higher Than Fair Value (Income Tax Implications)**
* If shares are transferred **at a price higher than their fair value** (e.g., Fair value Rs.5/share, Transfer price Rs.11/share), then:
* The **difference between transfer price and fair value (Rs.6/share in this case)** may be treated as a **perquisite** or **gift** for the transferee if the transfer is **between related parties** (e.g., promoter to relative).
* For the **transferor (seller)**, capital gains tax will apply on the **actual sale consideration** (Rs.11/share) minus the cost of acquisition.
* For the **transferee (buyer)**, the cost of acquisition will be considered as the **actual purchase price** (Rs.11/share), which is higher and may impact future capital gains on sale.
* **Section 56(2)(x) of Income Tax Act** deals with transfer of shares at less than fair value (i.e., if shares are received for inadequate consideration, the difference may be taxable as income), but if the price is higher than fair value, the tax treatment usually follows capital gains principles.
---
### Summary:
| Situation | Valuation Basis | Tax Treatment |
| ---------------------------------------------- | ------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- |
| Transfer price = Fair value | Transfer date or latest balance sheet date | Capital gains tax on actual transfer price. |
| Transfer price > Fair value | Same as above | Transferor taxed on actual sale price; transferee’s cost is actual price paid. Possible perquisite/gift implications if related parties. |
| Transfer price < Fair value (Section 56(2)(x)) | Fair value | Difference treated as income in hands of transferee (if shares acquired without adequate consideration). |
---
### Practical Tips:
* **Get shares professionally valued** before transfer, especially if significant difference exists between fair value and transfer price.
* Maintain **proper documentation** to justify the valuation date and method.
* Consult a **tax advisor** for transactions between related parties to address gift/perquisite issues.
---
If you want, I can help draft a simple share valuation template or provide more details on capital gains calculations. Would that help?
---
### 1. **Valuation of Shares for Transfer**
* **Method:** Generally, shares of a private limited company are valued using methods like:
* **DCF (Discounted Cash Flow) method**, or
* **Net Asset Value (NAV)**, or
* **Comparable market price method**, etc.
* The **fair value** of shares is typically computed based on the **last audited financials** and future earning projections.
* The **date of valuation** is usually:
* The **date of transfer** of shares, OR
* The **latest balance sheet date** (financial statements) preceding the date of transfer.
In practice, valuation is often done on the last audited balance sheet date for ease, unless there is a significant change requiring fresh valuation.
---
### 2. **Transfer Price Higher Than Fair Value (Income Tax Implications)**
* If shares are transferred **at a price higher than their fair value** (e.g., Fair value Rs.5/share, Transfer price Rs.11/share), then:
* The **difference between transfer price and fair value (Rs.6/share in this case)** may be treated as a **perquisite** or **gift** for the transferee if the transfer is **between related parties** (e.g., promoter to relative).
* For the **transferor (seller)**, capital gains tax will apply on the **actual sale consideration** (Rs.11/share) minus the cost of acquisition.
* For the **transferee (buyer)**, the cost of acquisition will be considered as the **actual purchase price** (Rs.11/share), which is higher and may impact future capital gains on sale.
* **Section 56(2)(x) of Income Tax Act** deals with transfer of shares at less than fair value (i.e., if shares are received for inadequate consideration, the difference may be taxable as income), but if the price is higher than fair value, the tax treatment usually follows capital gains principles.
---
### Summary:
| Situation | Valuation Basis | Tax Treatment |
| ---------------------------------------------- | ------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------- |
| Transfer price = Fair value | Transfer date or latest balance sheet date | Capital gains tax on actual transfer price. |
| Transfer price > Fair value | Same as above | Transferor taxed on actual sale price; transferee’s cost is actual price paid. Possible perquisite/gift implications if related parties. |
| Transfer price < Fair value (Section 56(2)(x)) | Fair value | Difference treated as income in hands of transferee (if shares acquired without adequate consideration). |
---
### Practical Tips:
* **Get shares professionally valued** before transfer, especially if significant difference exists between fair value and transfer price.
* Maintain **proper documentation** to justify the valuation date and method.
* Consult a **tax advisor** for transactions between related parties to address gift/perquisite issues.
---
If you want, I can help draft a simple share valuation template or provide more details on capital gains calculations. Would that help?
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