Many private limited companies issue shares to existing shareholders through a rights issue at face value. A common question is:

If the market value of shares is much higher than the issue price, can there be any income tax problem?

Under the Income Tax Act 2025, the position is generally favourable for genuine rights issues.

What is a Rights Issue?

A rights issue means offering new shares to existing shareholders in proportion to their current shareholding.

Example:

• Existing shareholder holds 10% shares
• Company offers additional shares proportionately
• Shareholder gets the right to subscribe in the same ratio

Example

The question is:

Can the difference between FMV and issue price become taxable?

Position for the Company

Earlier, under the old Income-tax Act 1961, Sec 56(2)(viib) (Angel Tax) taxed companies where shares were issued at excessive premium.

However:

• Sec 56(2)(viib) has been removed under the Income Tax Act 2025.
• No similar provision exists in the new law.

Further, in this case:

• Shares are issued at face value
• No premium is charged

Therefore, there is generally no company-side tax issue.

Company Side Conclusion

✔ No angel tax
✔ No tax on share capital received
✔ No mandatory valuation under Income Tax Act 2025

Position for Shareholders

The shareholder-side provision is now Sec 92(2)(m) of the Income Tax Act 2025 (similar to old Sec 56(2)(x)).

This section taxes a person if property is received below Fair Market Value.

Since shares are treated as property, a question may arise:

If shares worth Rs.200 are issued at Rs.10, can the shareholder be taxed on Rs.190 benefit?

Important Legal Principle

Courts have generally taken a favourable view in rights issue cases.

The reasoning is simple:

• In a rights issue, the company creates new shares.
• It is not transferring old shares.
• Therefore, shareholders are not “receiving property” below market value.

Because of this, courts have held that rights issues normally should not attract taxation merely because FMV is higher than issue price.

When Can Tax Risk Increase?

Risk may increase if:

• Some shareholders do not participate,
• Rights are renounced,
• One shareholder gets extra shares at a very low price.

In such cases, the tax department may argue that a benefit has been transferred.

Is Valuation Required?

Under the Companies Act 2013:

✔ Valuation is not required for rights issue to resident shareholders.

Under Income Tax Act 2025:

✔ No specific mandatory valuation requirement exists.

However, obtaining a valuation report may still be advisable for record and future defence.

Practical Safeguards

Companies should maintain:

• Board resolutions
• Offer letters
• Shareholder confirmations
• Bank payment proofs
• Proper ROC filings

It is also advisable that:

✔ All shareholders participate proportionately
✔ Payments are received through banking channels
✔ A basic valuation report is maintained if FMV is substantially high

Final Conclusion

A rights issue at face value by a private limited company generally carries low tax risk under the Income Tax Act 2025 when:

• shares are issued proportionately,
• all shareholders participate, and
• proper records are maintained.

The old angel tax provision has been removed, and judicial precedents support the view that rights issue represents creation of shares rather than receipt of property below FMV.