Share premium under income tax

One of the major changes in the Finance Act of 2012 is the introduction of Section 56(2)(viib) of the Income Tax Act, 1961 (“Act”), which provides that if a company in which public is not substantially interested, issues shares at a premium, then the aggregate amount of premium, over and above the fair market value of shares will be subject to income tax.

The Central Board of Direct Taxes (“CDBT”) vide notification no. 52/2012 (“Notification”), dated 29 November, 2012, has amended Rule 11U and 11UA of the Rules. Pursuant to the Notification the companies can use Discounted Cash Flow (“DCF”) method of valuation, for determining fair market value of unquoted equity shares, for the purposes of Section 56(2)(viib) of the Act.