Start with the seller’s consideration test
For tax year 2026–27, section 79 of the Income-tax Act, 2025 applies where a capital asset is a company share other than a quoted share and actual consideration is below prescribed fair market value. The substituted value feeds section 72’s capital-gain computation; the sale contract does not automatically change to that amount. This article addresses a resident corporate seller’s unquoted equity investment, not trading inventory, a fresh share issue or the buyer’s separate receipt taxation. Sources were checked on 29 October 2026. Income-tax Act, 2025, sections 72 and 79. Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, sections 72 and 79.
Identify the transfer and valuation date
The section 79 quoted-share definition requires quotation on a recognised exchange with regularity, based on current ordinary-course transactions. Listing status alone is not the complete statutory wording. Rule 56(i), Table item 2, specifies the transfer date for this valuation. Keep separate workings where different tranches transfer on different dates; an agreement-date commercial valuation does not automatically establish each transfer-date statutory amount. Notified Income-tax Rules, 2026, rule 56.
Build the actual rule 57 equity formula
Rule 57, Table item 4, gives FMV = (A + B + C + D − L) × PV / PE. A excludes the specified jewellery/art, share/security and immovable-property assets and is reduced for the stated net tax payment and asset-less expenditure items. B uses the registered-valuer jewellery/art value; C uses share/security values under the rule; D uses the immovable-property stamp-duty value. PV is the paid-up value of the equity shares valued and PE the total paid-up equity capital. Use consistent units and avoid counting a revalued asset again inside A. The notified table references sections 26(2)(j), 72 and 92; do not relabel its column as a quotation of section 79. Rule 57, Table item 4 and its definitions.
Do not treat every balance-sheet credit as L
The rule excludes equity paid-up capital, specified undeclared-dividend amounts, reserves/surplus other than depreciation reserves, the specified excess tax provision, unascertained-liability provisions and contingent liabilities subject to its cumulative-preference-dividend exception. Establish each adjustment from the audited transfer-date balance sheet and supporting schedules. A commercial enterprise valuation or a Companies Act valuation does not by its label replace the prescribed tax calculation. Table item 5 supplies a different open-market approach for the non-equity instruments within its stated population. Rules 56(a) and 57, Table items 4–5.
Check the narrow exception before using it
Section 79(2) permits prescribed exclusions. Rule 58(2) links the transfer exclusion to sub-rule (1), Table item 2: the specified Tribunal/government-board-replacement and approved-resolution-plan conditions must be satisfied. A routine distressed sale, related-party transaction or private valuation discount does not establish that exception. Likewise, section 79 supplies no general 110% tolerance copied from the land/building provision in section 78. Sections 78–79; rule 58(2), linked Table item 2.
Close the gain bridge and preserve the period distinction
After settling actual versus deemed consideration, deduct only the separately supported section 72 transfer expenditure and acquisition/improvement cost. Reconcile the tax adjustment to book disposal profit without adding the same uplift twice. All examples assume no applicable exclusion, no indexation, no other cost adjustment and amounts before the separate rate, surcharge and cess computation. They use the 2025 Act for a 2026–27 tax-year transfer; they are not instructions to renumber an AY 2026–27 return for FY 2025–26. Sections 1, 72 and 79.
Applicable primary references
Income Tax Department: Income-tax Act, 2025 as amended by Finance Act, 2026, sections 72 and 79 CBDT notified Income-tax Rules, 2026, rules 56–58
Six worked illustrations
All facts and amounts below are fictional. Assumptions describe the model, not additional statutory rules.
Illustrative example 1: Formula and seller’s gain
A is ₹1.20 crore, B nil, C ₹30 lakh, D ₹80 lakh and eligible L ₹50 lakh. PV is ₹10 and PE ₹20 lakh. FMV per fully paid share = ₹1.80 crore × 10 / ₹20 lakh = ₹90. For 10,000 shares sold at ₹60, deemed consideration is ₹9 lakh rather than ₹6 lakh. With cost ₹4 lakh and eligible transfer expenditure ₹10,000, the gain is ₹4,90,000.
Illustrative example 2: Actual price exceeds prescribed value
Retain the first example’s ₹90 FMV but sell 10,000 shares at ₹110. Actual consideration is ₹11 lakh, exceeding FMV ₹9 lakh. Section 79 does not replace it with the lower value. With ₹4 lakh cost and ₹10,000 eligible expenditure, the gain is ₹6,90,000.
Illustrative example 3: Small shortfall is still a shortfall
A separately supported valuation gives ₹94.50 per share for 10,000 shares sold for ₹9 lakh. FMV consideration is ₹9,45,000, an uplift of ₹45,000 or 5% of actual price. No general 10% share-price tolerance is assumed. Cost ₹4 lakh and eligible expense ₹10,000 give gain ₹5,35,000.
Illustrative example 4: Correct A before multiplying shares
Other book assets are ₹1.20 crore, including income tax paid ₹10 lakh with refund claimed ₹2 lakh and ₹4 lakh of expenditure representing no asset. Correct A is ₹108 lakh. With B nil, C ₹30 lakh, D ₹80 lakh and eligible L ₹50 lakh, adjusted net assets are ₹168 lakh. PV ₹10 / PE ₹20 lakh gives ₹84 per share. For 10,000 shares sold at ₹60, deemed proceeds ₹8.40 lakh less ₹4 lakh cost and ₹10,000 expense give ₹4,30,000 gain.
Illustrative example 5: Remove ineligible liability components
Book credits total ₹120 lakh: eligible liabilities ₹55 lakh, equity capital ₹20 lakh, reserves ₹30 lakh, unascertained provision ₹10 lakh and contingent liability ₹5 lakh. Assume each exclusion is established and no exception applies. Using assets A + B + C + D of ₹230 lakh, eligible net assets are ₹175 lakh, not ₹110 lakh. With PV ₹10 and PE ₹20 lakh, FMV is ₹87.50; 10,000 shares at ₹60 give ₹8.75 lakh deemed proceeds and ₹4,65,000 gain after the same cost and expense.
Illustrative example 6: Value two transfer dates separately
A seller transfers 5,000 shares at each of two dates, both priced at ₹60. Prescribed FMV is ₹90 on the first date and ₹100 on the second. Deemed consideration is ₹4.50 lakh + ₹5 lakh = ₹9.50 lakh. Using the first date’s value for all shares would understate it by ₹50,000. Total supported cost ₹4 lakh and eligible expense ₹10,000 give gain ₹5,40,000.
Ten-step verification table
| Step | Action | Evidence |
|---|---|---|
| 1 | Fix the applicable period | Record the transfer date and correct enactment. |
| 2 | Classify the seller’s asset | Distinguish capital investment from inventory and new issuance. |
| 3 | Test quoted status | Retain exchange and actual quotation evidence. |
| 4 | Check the exclusion | Match rule 58(2) to every condition in linked Table item 2. |
| 5 | Obtain the valuation-date accounts | Keep the audited balance sheet and notes under rule 56. |
| 6 | Rebuild A to D | Trace excluded book assets and their prescribed replacement values. |
| 7 | Review eligible L | Explain each capital, reserve, provision and contingency exclusion. |
| 8 | Verify PV and PE | Use compatible paid-up values and units for the equity population. |
| 9 | Compute each transfer | Compare actual consideration with its prescribed value separately. |
| 10 | Reconcile the seller computation | Bridge deemed proceeds, allowed cost/expense and book gain once. |
Sixteen practitioner FAQs
1. Is this article for AY 2026–27 return filling?
No. It addresses capital transfers in tax year 2026–27 under the 2025 Act.
2. Does section 79 apply to every business asset?
Its stated population is a capital asset being a company share other than a quoted share.
3. Does unlisted automatically mean the complete test is finished?
Check the statutory quoted-share definition and instrument facts.
4. Which date does rule 56 identify?
The date of transfer for the section 79 share.
5. Can the agreement-date report always be reused?
Only after establishing that it supports the required date and method.
6. Where is the equity formula located?
Rule 57, Table item 4, with its component definitions.
7. Can immovable property stay in A and also enter D?
That would double count it; apply the defined components.
8. Are equity capital and ordinary reserves deductible L?
They fall within the rule’s stated exclusions, subject to its exact wording.
9. Does every provision reduce the valuation?
No. Ascertainment and the specified tax-provision adjustments matter.
10. Can a commercial DCF report replace the formula merely because it is professional?
Its label does not override the prescribed method for this population.
11. Is there a general 10% tolerance here?
Section 79 does not supply the section 78 land/building tolerance.
12. What happens when actual consideration exceeds FMV?
This provision does not substitute the lower FMV.
13. Is every insolvency-related sale excluded?
No. Establish the precise rule 58(2) conditions.
14. Does the deemed amount increase the buyer’s contractual debt?
The tax computation does not itself rewrite the sale price.
15. Does this calculation settle the buyer’s tax consequences?
No. Analyse the buyer’s receipt provisions separately.
16. What is the final review control?
One transfer-date valuation feeding one seller gain bridge without duplicate uplift.
Conclusion
For a covered capital-asset share transfer in tax year 2026–27, section 79 can substitute prescribed fair value for a lower sale price. Build the transfer-date valuation and seller capital-gain bridge separately from the buyer’s tax analysis.