Short answer: when shares of an Indian private company move between a resident and a non-resident, FEMA sets the price boundary: a non-resident buyer must pay not less than fair value, and a resident buyer must pay not more than fair value, with fair value certified by a chartered accountant, SEBI-registered merchant banker or practising cost accountant. The resident party reports the transfer on Form FC-TRS within 60 days. Up to 25% of the price can be deferred or held in escrow for 18 months. Separately, income tax applies its own fair market value to both seller and buyer, and where the seller is non-resident, the buyer withholds tax on the gain.
The typical cases for a foreign-owned company are the parent buying out an Indian founder or minority holder, and the reverse: an Indian buyer, or an Indian group company, taking shares from the foreign parent.
| Direction | FEMA price rule (unlisted company) | Why |
|---|
| Resident sells to non-resident | Price not less than fair value | Money coming into India should not be understated |
| Non-resident sells to resident | Price not more than fair value | Money leaving India should not be inflated |
Both rules are in Rule 21 of the Foreign Exchange Management (Non-Debt Instruments) Rules 2019. Fair value is worked out under any internationally accepted pricing methodology on an arm's length basis, in practice usually a discounted cash flow (DCF) valuation, and certified by one of three professionals:
- a chartered accountant;
- a merchant banker registered with SEBI; or
- a practising cost accountant.
The rule also says the non-resident is not guaranteed any assured exit price. A put option or a shareholders' agreement promising the foreign parent a fixed return on exit does not override the pricing cap when the shares are eventually sold to a resident.
The June 2026 amendments to the Non-Debt Instruments Rules (the Third Amendment Rules of 12 June 2026) widened the class of individual non-residents who can invest and reset portfolio limits. They did not change the pricing rule or the deferred-consideration rule for unlisted shares.
Land-border investors
A transfer to a buyer from a country sharing a land border with India, or whose beneficial owner is in one, can need government approval regardless of price, and a transfer that pushes beneficial ownership over the threshold needs approval at that point. The 2026 changes are set out in Press Note 3 in 2026.
Rule 9(6) of the Non-Debt Instruments Rules allows the parties to hold back part of the price, within limits:
| Mechanism | Maximum | Period |
|---|
| Deferred payment by the buyer | 25% of total consideration | Within 18 months of the transfer agreement |
| Escrow between buyer and seller | 25% of total consideration | Up to 18 months from the transfer agreement |
| Indemnity by the seller | 25% of total consideration | Up to 18 months from payment of the full consideration |
The total consideration finally paid must still comply with the pricing guidelines. On a sale by the parent to a resident, an earn-out that lifts the final price above fair value breaches the cap, however it was structured. On a sale by a founder to the parent, a price adjustment that takes the final price below fair value breaches the floor.
The transfer is reported on Form FC-TRS on the RBI's FIRMS portal, through the authorised dealer (AD) bank:
- Who: the resident party to the transfer, whether seller or buyer. Where the non-resident holds the shares on a non-repatriation basis, that non-resident.
- When: within 60 days of the transfer of the shares or the receipt or remittance of the funds, whichever is earlier.
- With what: the valuation certificate, the share purchase agreement, the KYC of the non-resident, and the bank's evidence of the inward or outward remittance.
In practice the company records the transfer in its register once the FC-TRS has been acknowledged by the bank. Where part of the price is deferred, the 60-day clock still runs from the first transfer or payment; how later tranches are reported should be agreed with the AD bank at the outset.
FC-TRS is a secondary-transfer filing, so it arises without any money reaching the company. That is why it is missed. A delay is regularised with a Late Submission Fee within three years of the due date; after that, compounding. Both are set out in the FEMA filings foreign-funded companies miss.
The seller's capital gain
The seller is taxed on the gain. For unlisted shares held more than 24 months, long-term capital gain on a transfer on or after 23 July 2024 is taxed at 12.5% (Section 112 of the 1961 Act, Section 197 of the 2025 Act), plus surcharge and cess. A non-resident seller computes that gain without indexation and without the foreign-exchange conversion that applies to some other non-resident gains. Short-term gains are taxed at the seller's normal rate.
Where the seller is a non-resident company, the relevant treaty may change the position, depending on the treaty's capital gains article and when the shares were acquired.
The buyer withholds when the seller is non-resident
A buyer paying a non-resident seller must deduct tax under Section 195 of the 1961 Act, which for tax year 2026-27 onwards is the non-resident table in Section 393(2) of the Income-tax Act 2025. The obligation applies to the part of the payment that is chargeable to tax, which for a share sale is the gain, not the whole price. The Supreme Court confirmed that limit in GE India Technology Centre (2010).
In practice:
- the buyer needs a TAN;
- the gain, the rate and the treaty position are certified in Form 146, or the seller obtains a lower-deduction certificate from the Assessing Officer before closing;
- the buyer files Form 145 before the remittance, deposits the tax, and reports it in the quarterly non-resident statement.
A resident seller selling to a non-resident is not subject to this withholding; the resident pays its own tax on the gain. The remittance mechanics are in Forms 145 and 146.
Two fair-market-value rules that apply regardless of FEMA
Income tax has its own valuation, and it bites on both sides of a transfer below fair market value:
| Provision | Who it affects | What it does |
|---|
| Section 50CA of the 1961 Act (Section 79 of the 2025 Act) | The seller of unquoted shares | If the price is below fair market value, fair market value is deemed to be the sale price for computing the gain |
| Section 56(2)(x) of the 1961 Act (carried into Section 92 of the 2025 Act) | The buyer | If shares are received for less than fair market value, and the shortfall exceeds ₹50,000, the difference is taxed as the buyer's income |
Fair market value here is determined under Rule 11UA of the 1962 Rules (Rule 57 of the 2026 Rules), by a prescribed formula based largely on adjusted net asset value, not by DCF.
Where the two regimes collide
The FEMA value (usually DCF) and the income-tax value (largely net assets) can be far apart.
- Resident founder sells to the parent. FEMA sets a floor at the DCF value; Section 50CA (for the founder) and Section 56(2)(x) (for the parent) both bite below the net-asset value. The price must clear the higher of the two. Usually workable, because the parent can pay more.
- Parent sells to a resident. FEMA sets a ceiling at the DCF value. Section 56(2)(x) taxes the resident buyer if the price is below the net-asset value, and Section 50CA deems the parent's sale price to be at least that value. If the net-asset value exceeds the DCF value, as it can in a loss-making company with substantial assets, no price satisfies both without a tax cost to someone.
The second case is the one to model before terms are agreed. The practical answers are a fresh valuation on both bases as at the same date, a different route (a buy-back or capital reduction rather than a transfer), or accepting and pricing the tax cost.
Stamp duty on a transfer of shares is 0.015% of the consideration, applied uniformly across states since 1 July 2020 under the amendments made to the Indian Stamp Act by the Finance Act 2019. For shares held in demat form, the depository collects it on the transfer; for a physical transfer it is paid on the transfer deed in Form SH-4.
Most foreign-owned private companies will be transferring in demat form. Rule 9B of the Companies (Prospectus and Allotment of Securities) Rules requires private companies other than small companies to issue and transfer securities only in dematerialised form, with the deadline last extended to 30 June 2025. A subsidiary of a foreign company is excluded from the definition of a small company by Section 2(85), so the requirement applies to it whatever its size. A holder with physical shares needs to dematerialise them before the transfer.
- Map residence. Who is resident and who is not on the transfer date, including founders who have moved abroad.
- Value twice, on the same date. A FEMA fair value certificate and a Rule 11UA computation, before the price is fixed.
- Check the land-border position of the buyer and its beneficial owners.
- Settle the tax. The seller's gain, the buyer's withholding, and any Section 50CA or 56(2)(x) exposure.
- Draft the agreement with any deferral or escrow within 25% and 18 months, and a final price that stays inside the FEMA boundary.
- Dematerialise if needed, execute, pay stamp duty.
- File FC-TRS within 60 days, then update the company's registers and its FEMA reporting, including the next FLA return.
Where the transfer is part of a wider restructuring of the parent's holding, or the parent is putting in fresh capital at the same time, the FC-GPR side is covered in foreign share capital infusion and the FC-GPR sequence.
This note sets out the general position as at 23 September 2026 for transfers of shares of an unlisted Indian company between a resident and a non-resident, under the Non-Debt Instruments Rules as amended to June 2026, the Income-tax Act 1961 and the Income-tax Act 2025. The valuation methods, the treaty position on the seller's gain and the reporting of deferred consideration all depend on the facts. Confirm the pricing, the withholding and the filing mechanics with the AD bank before the share purchase agreement is signed.