How to calculate long term capital gain on unlisted shares

Hello,

Since the shares under question are unlisted, LTCG on sale os such unlisted shares would be taxable at 20% plus cess with indexation benefits. Purchase price of Rs. 3500 will be indexed using the cost inflation index and reduced from the sale consideration of Rs. 2,01,635, which would be further reduced by transfer expenses, if any. The resultant figure would be LTCG and taxable at 20% plus cess.

I hope this answer satisfies your requirement.

Regards,

CA Hunny Badlani

Dear Sir,

Hope you are doing well !!

When an owner of Unquoted share ("Shares") in a Company transfers the shares to any person, he is required to pay Capital Gain tax on the difference between the sale consideration received by him and the cost of acquisition of such shares (or the inflation indexed cost, wherever applicable).

It is important to check if the "Sale consideration" that he receives from the buyer is at least equal to or more than the "Fair Market Value" ("FMV") as defined under Rule 11UA of The Income Tax Rules, of the shares sought to be transferred.

As defined under Rule 11UA, 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 under (a) or (b), at the option of the assessee, namely; -

Option (a):

The fair market value of unquoted equity shares shall be calculated simply by ascertaining "Book value of Assets (Less) Book value of Liabilities."

• For ascertaining the book value of assets, following amounts shall be excluded:
  
  

  • Advance Tax, Tax deduction or collection at source or any amount of tax paid as reduced by refund claimed under the Income Tax Act.
  • any unamortized amount of deferred expenditure which does not represent the value of any asset.

• For ascertaining the book value of liabilities, following amounts shall be excluded:
  
  

  • the paid-up capital in respect of equity shares;
  • the amount set apart for payment of dividends on preference or equity shares
  • reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation;
  • any amount representing provision for taxation, other than amount of tax paid as reduced by the amount of tax claimed as refund
  • any amount representing provisions made for meeting liabilities, other than ascertained liabilities;
  • any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.

Option (b):

The fair market value of the unquoted equity shares as determined by a Merchant B anker as per Discounted Free Cash Flow Method. Earlier, a Chartered Accountant was also permitted to determine the FMV of such equity shares. However, with effect from 24th May 2018, this right of Chartered Accountant is taken away and therefore only Merchant Banker is authorised to determine the FMV of such equity shares.

If the transaction of transfer of shares takes place at a price which is less than the FMV, there is a tax impact both on buyer of the shares as well as the seller. The legislation has made an attempt to In order to ensure the full consideration is not understated in case of transfer of unlisted shares, section 50CA

Impact of Tax on Seller – Section 50CA:

If the seller receives sale consideration on sale/transfer of unquoted equity shares which is less than the FMV of such shares, the FMV of such shares shall be deemed to be the Sale consideration received or accrued on such transfer of shares. Therefore, while computing the Capital Gain on transfer of shares, FMV of share will replace the actual sale consideration on transfer of such shares. The seller, in such case, will have to pay Capital Gain tax on difference between FMV of the shares and cost price (or the inflation indexed cost price, as the case may be) of such shares.

We have handled such cases before.

We may help you in CG calculation. 

Hi

For sale of unlisted shares, valuation of FMV of shares has to be done in accordance with Rule 11UA of the income tax rules.

If shares are sold at a value less than FMV, section 50CA will be attracted.

No Sir.

It is not okay.

You will have to obtain FMV.

We will help you for the same. 

If these shares are other than quoted shares, you need to determine their fair market value as per Sec. 11UA(1)(c)(b).

No. FMV cannot be same as cost. It would be same in exceptional situations only.

It is advisable to get a valuation report under rule 11UA from a registered valuer or a merchant banker.

- You were required to obtain merchant banker report for the calculation of sale consideration. Please check what is the book vale of the share as on 31.03.2019.

- From FMV. deduct the indexation cost of shares.

You need to just index this cost of 2005.

You dont need FMV as its only for listed equity shares on which STT paid.

So your capital gain would be 201635 less 8376.

And tax would be paid @20%

Hope you find the information helpful if you do please rate it 5 and provide your valuable feedback for my improvement.

Thank you.

Hello Sir,

You need to get the valuation report  under rule 11UA to determine FMV of unlisted shares.