Angel tax died, but two quieter provisions still tax startup share deals – and they hunt in a pair. Buy shares below fair market value and s.92 of the Income-tax Act 2025 (old 56(2)(x)) taxes you on the shortfall. Sell unquoted shares below FMV and s.79 (old 50CA) taxes the seller on money never received. Both run off the same Rule 57 NAV valuation, both bite hardest in secondaries between related parties, and both have carve-outs the case law has steadily widened. This guide maps who is exposed on each kind of share deal – rights issues, preferential allotments, bonus shares, ESOPs, secondaries – with the current authorities.
The double engine on a discounted secondary
Rule 57 NAV FMV ₹320/share; a buyer takes 50,000 shares off a departing angel at ₹200 (₹1 crore). Buyer: shortfall 50,000 × (320 – 200) = ₹60 lakh – above the ₹50,000 de minimis – taxed as income from other sources (≈ ₹18.7 lakh at the 30% slab), with cost stepping up to ₹320 under s.73 (old 49(4)) for the future exit. Seller: s.79 deems the sale consideration to be 50,000 × ₹320 = ₹1.6 crore – capital gains computed on ₹60 lakh of money never received. The same cash, taxed twice into line with FMV. The step-up is the only relief valve, and it belongs to the buyer alone. One structural mercy: because startup NAV is usually far below deal prices (intangibles never reach the balance sheet), genuinely arm’s-length startup secondaries rarely trip the test – the exposure concentrates in related-party and employee transfers priced casually.
Transaction-by-transaction exposure map
| Transaction | s.92 (buyer/recipient) | Authority / note |
|---|---|---|
| Pro-rata rights issue at any price | Not taxable | Sudhir Menon HUF (ITAT Mum) affirmed by PCIT v Jigar Jashwantlal Shah (2024) 460 ITR 628 (Guj HC): allotment is creation, not receipt, of property |
| Disproportionate / renounced rights taken beyond entitlement | Exposed on the excess slice | The same line of cases carves this out of the protection |
| Fresh preferential allotment below FMV | Contested – treat as exposed | Torque Pharmaceuticals (ITAT Chd 2026) extends creation-not-receipt to s.56(2)(x); CBDT’s stated intent and other commentary run contra. Paper the valuation, price the risk |
| Bonus shares | Not taxable | DCIT v Aruna Chandhok (ITAT Del 2023), following Dr Ranjan Pai (Kar HC) – capitalisation of reserves; cost of bonus shares is nil |
| ESOP allotment below FMV | Taxed as salary perquisite instead | Published position: no second s.92 charge on the same differential – though the carve-out is doctrinal, not an express schedule entry. See the ESOP guide |
| Secondary purchase below FMV | Squarely taxable (the provision’s home ground) | Shortfall beyond ₹50,000; relative/occasion exemptions per the section |
| Anti-dilution top-up shares at nominal price | Arguable exposure at NAV FMV | No direct ruling; the Torque defence applies if structured as fresh allotment – see the down-round guide |
The seller side: s.79 in practice
s.79 substitutes Rule 57 FMV (on the transfer date – Rule 56 fixes the valuation dates) for the stated consideration whenever unquoted shares change hands below FMV. It applies to transfers, not fresh issues, and Rule 58 carries forward the exempt classes – notably share transfers under NCLT-approved resolution plans. Three planning notes. First, the rule is computational, not intent-based: a genuine distress sale below NAV is still deemed at NAV – the answer is a contemporaneous valuation showing why FMV itself is low (NAV falls fast when losses erode book value). Second, employee secondaries arranged by the company (increasingly common liquidity events) should be priced at a certified FMV so neither the selling employee (s.79) nor the buying investor (s.92) inherits a deemed-income surprise. Third, for foreign sellers the FEMA exit cap points the other way – sale to a resident at or below FMV – so cross-border secondaries thread a needle: at FMV satisfies both statutes, and that is where deals settle (see the FEMA pricing guide).
Rights issue vs preferential allotment: the ₹12 lakh difference
What survived angel tax on the company side
Nothing in s.92 taxes the issuing company – that was angel tax, and it is gone (issues from FY 2024-25 onward, with no successor provision). What the company still faces is s.102 (old s.68): share capital and premium credited in the books must be explained – investor identity, creditworthiness and genuineness, including source-of-source for closely held companies. The valuation report you no longer need for angel tax remains Exhibit A in a s.102 file. The history and what it means for round design is in our angel tax guide; instrument-level tax treatment (CCPS and CCD conversions are not transfers – s.70) is in the instrument comparison.
Pricing a secondary or a below-market allotment?
My Cloud Accountant runs the Rule 57 numbers both ways, papers the valuation, and structures the transaction so neither side inherits deemed income.
Talk to an expertFrequently Asked Questions
Does s.92 apply when a VC invests at a premium?
No – s.92 taxes buying below FMV, and investing above NAV-based FMV is the normal startup case. Premium investment triggers neither s.92 (no shortfall) nor angel tax (abolished). The company just keeps its s.102 file in order.
We are issuing shares to a co-founder’s family member at face value. Problem?
Potentially, twice: s.92 exposure for the allottee on the NAV shortfall (unless within the relative exemption – check the definition against the actual relationship), and a governance flag for future diligence. If the person is a relative of an existing shareholder within the statutory list, the exemption may cover it; document the position either way.
How is the ₹50,000 threshold applied?
Per recipient, per year, on the aggregate shortfall across such receipts. It is a cliff, not an exemption: cross it and the entire shortfall is taxable, not just the excess over ₹50,000.
Do these sections apply to NRI and foreign buyers?
Yes – s.92 and s.79 apply regardless of residence, alongside FEMA’s separate pricing rails. A foreign buyer in a below-FMV secondary faces s.92 on the shortfall and the seller faces s.79 – while FEMA simultaneously caps a non-resident seller’s exit at FMV. Transactions at certified FMV satisfy all three. The foreign investor hub covers the FEMA side end to end.
Last reviewed: August 2026. Income-tax Act 2025 ss.73, 79, 92, 102; Income-tax Rules 2026 Rules 56–58; authorities: Sudhir Menon HUF (ITAT Mum), PCIT v Jigar Jashwantlal Shah (2024) 460 ITR 628 (Guj HC), Torque Pharmaceuticals (ITAT Chd 2026), DCIT v Aruna Chandhok (ITAT Del 2023).