A significant and highly welcomed change that will affect business and investors in India during the financial year FY 2025-26 is the abolition of the Tax on Excess Share Premium. Entrepreneurs, start-ups and private limited companies are particularly interested in this development since it has a direct effect on ITR filing and compliance. We can deconstruct this and understand what this is, why it is important and how to implement it.
What is “Tax on Excess Share Premium”?
In situations where a company issues shares at a price other than the face value, as well as the fair market value (FMV), the disparity between the FMV and the issue price is known as excess share premium. Previously, this excess amount was subjected as an income under Section 56(2)(viib) of the Income Tax Act, 1961, and taxed as an Income of Other Sources. Such tax on excess share premium was mainly directed towards unlisted and closely held businesses to ensure that they do not inflate the value of the shares and also avoid transferring unaccounted money by the share capital.
The Big Change in FY 2025-26 – No More Tax on Excess Share Premium
From Assessment Year 2025-26, the tax on excess share premium will not be paid by companies any longer. The intention of this move is to ease the capital raising process and make it easier to conduct business.
In simpler words:
- In case a company issues the shares at a price that is above FMV the surplus premium will not be treated as income.
- The segment that addresses such taxation has been rendered inapplicable starting FY 2025-26.
- This is a relief to thousands of start-ups and other private companies that were subjected to scrutiny on share valuations.
Why Does This Matters for ITR Filing?
This update is important to understand in order to file ITR properly and in compliance. Here’s why:
- Companies that are offering shares at a premium do not have to record the surplus as taxable income any more.
- It eases the calculation of income and tax amount to pay when filing ITR.
- Start-ups and investors are able to plan fund-raising and not worry about valuation-related tax disputes.
- Tax practitioners can ease up on filling ITR by not including the older entry of Income from Other Sources in the filing which regards share premium.
Old vs. New: What Has Changed
Earlier Rule:
- When a company that is closely-held issued shares at a value above FMV, the overvalue was taxable.
- FMV was calculated either on the Book Value Method or the Discounted Cash Flow (DCF) method.
- The exemptions were only available to start-ups and companies supported by venture capital that were recognized by DPIIT.
Now:
- Until FY 2025-26, this section is not applicable anymore.
- Firms are able to issue shares at a premium without having to worry about tax on excess share premium.
- The emphasis is now directed towards proper documentation and Valuation as opposed to payment of tax.
Practical Steps for Companies During ITR Filing
To achieve smooth compliance in FY 2025-26 the businesses can:
- Check Share Issue Details: Check whether you received any share premium and it is subject to the new regime or the old regime.
- Update Accounting Records: Since there is no tax to pay but the premium must be recorded in the books.
- Check Assessment Year: The exemption will be in AY 2025-26; the issues that precede it might continue to be tax-attractive.
- Keep Valuation Reports: Although no tax is paid on excess share premium, this is nevertheless very crucial in the audits.
- Make sure Filing of ITR is correct: Do not include affairs with taxable share premium in the schedule Income from Other Sources.
- Ask Your Tax Expert: Pro-Check This will make sure you implement the change in the ITR filing.
Benefits and Points of Caution
Advantages:
- Lower tax and compliance cost.
- Incentive to support start-ups and investors in raising real capital.
- Simplified disclosures also led to easier and faster ITR filing.
- Raised investor confidence in unlisted companies.
Points to Watch:
- The change is prospective; share issues that have been older can still be determined by prior rules.
- Maintain shareholder documentation and valuation even without the imposition of the tax.
- Do not think that it is blanket coverage in all situations – make sure that your company qualifies.
- Make sure that ITR filing is under the right assessment and provisions.
Conclusion
The progressive and business-friendly reform is the elimination of tax on excess share premium in FY 2025- 26. It streamlines compliance, increases investor confidence and ITR filing has become very easy to companies. Through effective record keeping and ensuring that the revised rule is followed, companies will be able to raise funds without any restrictions as long as they adhere strictly to the taxation regulations.
FAQs
Q1. Will private companies continue paying tax excess share premium in FY 2025-26?
No. This has been disallowed beginning in AY 2025-26.
Q2. What does this alteration have on ITR filing to a closely-held company?
The surplus premium is not included in taxable income in other sources any longer.
Q3. Are we not supposed to receive a valuation report on shares?
Yes. Records and verification are still necessary even in a scenario where no tax is paid.
Q4. Is this an asset to the start-ups only?
No, it is not only start-ups that are covered by the change.
Q5. Is there a possibility of issues with wrong valuation even when filling in ITR?
Yes. The scrutiny can be instigated by poor documentation or wrong valuation.
Q6. In what location should I report the share premium in the filing of ITR?
Present it in the capital section, it is no longer taxable.
In case you need any further guidance with regard to online ITR Filling, please feel free to contact us at 8881-069-069.
Now you can also Download E-Startup Mobile App and Never miss the latest updates relating to your business.