Transfer of Equity Shares of Unlisted Company- Capital Gains Perspective
Applicability of Section 50CA:
In case of sale of Unlisted Equity Shares, first thing we have to check that whether the sale consideration is less than the Fair Market value (FMV) or not. If shares are transferred at a price which is less than FMV, then sale consideration to be taken for the purpose of calculating the capital gains shall be the such FMV and not the actual sale consideration, as provided u/s 50CA. If the shares are transferred at a price more than or equal to FMV then such actual price will be taken as sale consideration and section 50CA will not apply and actual sale consideration will be taken.
Transfer of Shares as Gift: If there is no sale consideration or we can say that shares are gifted by the transferor then Capital gain tax shall not be levied as gifting of shares other than gifting to Employees under ESOP is not regarded as transfer by the virtue of Section 47(iii). However, transferee will be subjected to tax according to section 56(2)(x). (Note: we are not discussing here more about 56(2)(x) as we are reading this article from the perspective of Transferor).
Manner of Calculating FMV:
Method for determining the FMV of Unlisted Equity Shares in case when they are transferred is given under Rule 11UA(1)(c)(b) which reads as under:
| (b) | the fair market value of unquoted equity shares shall be the value, on the valuation date, of such unquoted equity shares as determined in the following manner, namely:— |
| the fair market value of unquoted equity shares =(A+B+C+D – L)× (PV)/(PE), where, | |
| A= book value of all the assets (other than jewellery, artistic work, shares, securities and immovable property) in the balance-sheet as reduced by,— | |
| (i) | any amount of income-tax paid, if any, less the amount of income-tax refund claimed, if any; and |
| (ii) | any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset; |
| B = the price which the jewellery and artistic work would fetch if sold in the open market on the basis of the valuation report obtained from a registered valuer; | |
| C = fair market value of shares and securities as determined in the manner provided in this rule; | |
| D = the value adopted or assessed or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property; | |
| L= book value of liabilities shown in the balance sheet, but not including the following amounts, namely:— | |
| (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 and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; |
| (iv) | any amount representing provision for taxation, other than amount of income-tax paid, if any, less the amount of income-tax claimed as refund, if any, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; |
| (v) | any amount representing provisions made for meeting liabilities, other than ascertained liabilities; |
| (vi) | any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; |
| PV= the paid up value of such equity shares; | |
| PE = total amount of paid-up equity share capital as shown in the balance-sheet;] |
And there is no requirement to obtain a report from the Merchant Banker or Chartered Accountant. The only requirement is that you have to prepare a balance sheet as on the date on which such shares are transferred and calculate the value accordingly.
So, until now we have seen that what value to be taken as sale consideration in different scenarios.
Cost of Acquisition:
Now after determining the Sale Consideration for the purpose of calculating capital gains, now come to calculate the cost of acquisition. There are some confusion remains in case of transferring of shares that whether indexation allowed or not in such cases, so according to third proviso to section 48, indexation is not allowed in case of transfer of “Listed Equity Shares” it implies that in case of transfer of “Unlisted Equity Share”, Indexation is allowed
Period of Holding
Now determine the period of holding the purpose of calculating the nature of Capital gain/Loss. As per Third proviso to Section 2(42A), in case Unlisted Equity Shares is transferred with in a period of 24 month from the date of its acquisition then Gain/Loss shall be of Short-Term Nature, if transferred after 24 months then nature of Gain/Loss will be long term.
Rate of Tax
Long Term Capital Gain: Taxable @ 20% u/s 112
(Note: In Case of Listed Equity Shares, Capital Gain up to Rs. 1 Lac Exempt and thereafter taxable @10% u/s 112A. This note is given here to clarify more precisely the difference between tax rate as applicable to Listed or Unlisted Equity Shares)
Short Term Capital Gain: Taxable as per the Normal rate of tax as applicable to the assessee.
(Note: Tax Rate of 15% in case of short-term capital gains applicable when we transfer Listed Shares u/s 111A)
Set-off and Caried Forward of Loss
Long Term Capital Gain Loss from Shares: Can be Set off only from any other Long Term Capital Gain Income and not from any other income, and if there is no other long term capital gain in that year then it can be carried forward up to next eight years.
Short Term Capital Gain Loss from Shares: Can be set off from any capital gain income whether it is long term or short term and if there is no other capital gain in that year then it can be carried forward up to next eight years.
Author Bio
I have been allotted shares of resulting company by the demerged company, before 2018. At the time of allotment the resulting company was listed on SE. Now, it’s delisted (in 2019). I want to sale these shares off market. What will be cost of acquisition for me? Can I opt FMV as on 31-01-2018 as cost of acquisition.
I work for a MNC in India which has it’s stock listed on NASDAQ in USA. I get RSUs of the US stock as a part of my compensation (listed under perquisites in form 16).
Scenario:
Note that my mother, father and the HUF have almost no income.
I gift “x” amount of those vested stocks to mother, “y” amount to my father and “z” amount to my father’s HUF.
Assumptions/Understanding:
(1) These gift transactions would not trigger any tax payment at both ends (giver and receiver) as they are exempted relatives.
(2) Given this transaction happens electronically (from my trading account to the receiver’s trading account), a record is always available of this transaction so a Gift Deed is not required.
(3) Since the gift is not given to the spouse here so clubbing provision don’t apply here.
(4) NASDAQ listed equity is counted as unlisted shares and STCG at tax slab is applied for sale under 24 months, LTCG at 20% with indexation after 24 months applies.
(5) The cost and date of acquisition of the gifted stock in the receiver’s hand would be the same as me (the giver).
(6) If my mother sells “x” amount of stocks within 24 months of the date of acquisition (not gifting), STCG would apply on the profit derived from “x” amount of stocks (sale price – cost of acquisition) as a part of her normal income as per her tax slab. And given her income is almost negligible that profit (upto a max of 10 lakhs) gets taxed at a rate much lower than 34.32% (had I sold them, I would have paid at 34.32% or had I waited for LTCG to kick in, 20% with indexation benefit). Is this understanding correct?