Ltcg on unlisted shares

Hi,

FMV does not imply the actual market value of the shares at which shares may be transacted between parties. It is the value of shares as determined based on book value of the assets and liabilities of the company.

As per Rule 11UA of the Income-tax Rules, 1962, the FMV of unquoted shares is to be determined as under:

(a) Equity shares: Book value of the shares to be computed as follows:

{(A-L)* PV}/ PE

where,

A = Book value of the assets in balance sheet as reduced by any amount paid as advance tax under the Income-tax Act and any amount shown in the balance sheet including the debit balance of the profit and loss account or the profit and loss appropriation account which does not represent the value of any asset.

L = Book value of liabilities shown in the balance sheet but not including the following amounts —

(i) the paid-up capital in respect of equity shares;

(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company;

(iii) reserves, by whatever name called, other than those set apart towards depreciation;

(iv) credit balance of the profit and loss account;

(v) any amount representing provision for taxation, other than amount paid as advance tax under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto;

(vi) any amount representing provisions made for meeting liabilities, other than ascertained liabilities;

(vii) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.

PE = Total amount of paid-up equity share capital as shown in balance sheet.

PV = the paid-up value of such equity shares.

Further, LTCG shall be calculated in the hands of the Shareholder and not the Company, which shall be the difference between the Sales Consideration and the Cost of Acquisition as per Section 112 of the Income Tax Act, at the rate of lower of the following:

-> 20% of capital gains after indexation and;

-> 10% of capital gains without indexation.

Gains are considered to be in the nature of ‘long-term capital gains’, when the shares (listed) transferred by the shareholder are held by him for a period of more than 12 months. On the other hand, if the shares are held for a period of up to 12 months by the shareholder before the transfer, then the gains would be in the nature of ‘Short-term capital gains’.

Short-term capital gains shall be taxed at the slab rate applicable to the individual shareholder. If the individual is in the 5% bracket, short-term gains would be taxed at 5%. If he is in the 20% or 30% bracket, then the short-term gains would be taxed at the rate of 20% or 30% respectively.