Business, Compliance

You're giving shares in your company to a cousin, a partner, or a co-founder. That's not automatically the tax-free gift it feels like

A share transfer within the family, or between co-founders, feels like an internal cap-table adjustment. The moment one side is a non-resident, both the tax rule and the exchange-control rule ask exactly who the two people are to each other, and the answer is narrower than most founders assume.

You want to give shares in your Indian company to someone, a cousin, an unmarried partner, a co-founder who's a non-resident, without any money changing hands. It feels like a formality, moving shares from one cap-table line to another. Two separate rules disagree with that instinct. The tax law only waives tax on the person receiving the shares if the giver counts as a defined "relative", a narrower list than most people assume, a cousin and an unmarried partner both fall outside it. And where one side is a non-resident, the exchange-control rules require a specific filing regardless, and, depending on who's involved, may require the Reserve Bank's prior approval before the gift can even happen.

Request a free CA call

Last reviewed: 6 September 20266 min readReviewed by Preetesh Maloo, CA

The short answer

A gift of shares between a resident and a non-resident always needs Form FC-TRS filed on the FIRMS portal within 60 days, backed by a valuation certificate, even though no consideration changes hands. Separately, Rule 9(4) of the FEMA (Non-Debt Instruments) Rules 2019 lets a resident gift shares to a non-resident on the automatic route only if the donor and donee are "relatives" as defined under Section 2(77) of the Companies Act (a specific list: spouse, parents, children, siblings, and a few others by marriage, not cousins, unmarried partners, or unrelated co-founders), the gift doesn't exceed 5% of the company's paid-up capital, and the donor's cumulative gifts to any person abroad in the financial year don't exceed the rupee equivalent of USD 50,000. Fall outside any of those conditions, a gift to a cousin or an unmarried partner, or one exceeding either limit, and it needs the Reserve Bank's prior approval instead of proceeding on the automatic route. On the tax side, a separate and different "relative" definition applies under Section 56(2)(x) of the Income-tax Act: if the giver isn't a relative under that list either, spouse, siblings, lineal ascendants/descendants and a few by marriage, the recipient is taxed on the shares' full fair market value as income, not a partial or discounted figure.

Is this your situation? Get a senior CA on it.

Free 15-minute call. We list the filings and their cost, then you decide. No India trip.

Senior CA who specialises in NRI-owned Indian companies · we handle the regulator, you stay abroad

Chat with a CA on WhatsApp

Related situations

Two separate "relative" tests, and neither one includes a cousin

The tax question and the exchange-control question each run their own, differently worded definition of who counts as family, and a founder checking only one can still fail the other. On the FEMA side, the automatic-route gift to a non-resident requires the donor and donee to be relatives under the Companies Act's Section 2(77) list, spouse, parents, children, siblings and a handful of specific in-law relations. On the tax side, Section 56(2)(x) uses its own, similarly narrow but separately worded list. A cousin, an unmarried partner, or a co-founder who isn't a blood or marriage relation under either list fails both tests, not just one, and the consequence on each side is different: FEMA requires prior RBI approval instead of the automatic route; tax means the recipient owes tax on the full value of what they received for nothing.

Even a gift that clears every test still needs the filing

Assume the giver and receiver genuinely are relatives on both counts, the gift is inside the 5% and USD 50,000 limits, and no tax arises on the recipient. Form FC-TRS is still due, within 60 days, on the FIRMS portal, backed by a valuation certificate for the shares. A zero-consideration transfer is still a transfer for this purpose; there's no exemption from the reporting obligation just because nothing was paid. Skipping the filing because "it's just a gift, not a sale" is one of the more common ways this trips up an otherwise-clean, well-within-limits gift.

Fall outside the FEMA conditions, and the automatic route is gone

A gift to someone who isn't a Section 2(77) relative, or one that exceeds 5% of paid-up capital or the donor's USD 50,000 annual cumulative cap, doesn't proceed on the automatic route at all. It needs the Reserve Bank's specific prior approval, a slower, case-by-case process, before the transfer can go through. This is the scenario that catches a founder gifting shares to a co-founder who isn't a blood relative, or an unmarried partner, cases that feel entirely ordinary inside the company but sit outside the automatic-route conditions on paper.

What goes wrong without a CA

The recurring pattern: the gift is treated as an internal, informal matter between people who already trust each other, and nobody separately checks either the Companies Act relative test for FEMA or the Income-tax Act relative test for the recipient's tax position, until a later funding round's diligence, or a tax notice to the recipient, surfaces both gaps at once. Checking who actually counts as a relative under each test, and whether the gift and its filing are handled correctly, before the shares actually move, avoids untangling both a FEMA gap and a tax bill on the same transfer after the fact.

What's involved

What the CA actually does

1
We check both relative tests before the gift happens
We confirm whether the giver and receiver qualify as relatives under the Companies Act's FEMA-side test and separately under the Income-tax Act's tax-side test, so you know upfront whether the automatic route and the tax exemption are actually available.
2
We handle the RBI approval where it's needed
Where the gift falls outside the automatic-route conditions, a non-relative recipient, or a value over the caps, we prepare and file the application for the Reserve Bank's prior approval.
3
We get the valuation and the FC-TRS filed
We arrange the share valuation certificate and file Form FC-TRS on the FIRMS portal within its window, whether or not any tax or RBI approval question is live.

What to have ready

Documents you'll typically need

Details of the shares to be gifted, and the company's current paid-up capital
The relationship between the giver and receiver, and their residency status
The giver's record of any other gifts made abroad in the same financial year
A recent share valuation, or the basis for one

References on this page

Rule 9(4), FEMA (Non-Debt Instruments) Rules 2019: a resident gifting capital instruments of an Indian company to a non-resident on the automatic route requires the donor and donee to be relatives within the meaning of Section 2(77), Companies Act 2013; the gift not exceeding 5% of the company's paid-up capital; the applicable sectoral cap not being breached; and the donor's cumulative gifts to any person resident outside India in the financial year not exceeding the rupee equivalent of USD 50,000. Falling outside any condition requires the Reserve Bank's prior approval
Section 2(77), Companies Act 2013, read with Rule 4 of the Companies (Specification of Definitions Details) Rules 2014: "relative" means a member of a Hindu Undivided Family, spouse, and specific listed relations by blood or marriage (parents, children, siblings and their spouses, and a few others); a cousin, an unmarried partner, or an unrelated co-founder is not within this list
Form FC-TRS: reports any transfer of capital instruments between a resident and a non-resident, including a gift at zero consideration, filed on the FIRMS portal generally within 60 days of the transfer, supported by a valuation certificate
Section 56(2)(x), Income-tax Act 1961: a recipient who receives shares (or other property) without consideration, where the fair market value exceeds Rs 50,000, is taxed on the full value as income from other sources, unless the giver is a "relative" under this section's own definition (spouse, siblings, lineal ascendants/descendants of the individual or spouse, and a few others), a narrower and separately defined list from the Companies Act 2(77) test used on the FEMA side

Frequently asked questions

Common questions

No. A cousin isn't a "relative" under either the Income-tax Act's own definition (spouse, siblings, lineal ascendants/descendants, and a few by marriage) or the Companies Act's Section 2(77) definition used on the FEMA side. The recipient owes tax on the full fair market value of the shares, and the gift needs RBI's prior approval rather than proceeding on the automatic route.

Yes. Form FC-TRS is due within 60 days on the FIRMS portal, backed by a valuation certificate, regardless of whether the gift clears every other condition. Being within the limits removes the need for RBI's prior approval; it doesn't remove the reporting requirement.

Yes, but not on the automatic route. Since you don't meet the Section 2(77) relative test, the gift needs the Reserve Bank's prior approval before it can proceed, a slower, case-by-case process rather than a routine filing.

No, they're separately defined, under different statutes, and worth checking independently. A person could conceivably qualify under one and not the other, though for the common non-qualifying cases, a cousin, an unmarried partner, an unrelated co-founder, both tests come out the same way: not a relative under either.

The exceptions that change the answer

Where the general rule stops applying to you

Every rule below has a carve-out, a cut-off date or a condition that flips the answer. These are the ones that decide real cases.

Taxable gift threshold under s.56(2)(x)

Right now: Rs 50,000 aggregate in a financial year

Where it works differently

The giver is a 'relative' as defined: No limit and no tax, whatever the amount.; Explanation to s.56(2)(x). The definition includes spouse, siblings, siblings of spouse, siblings of either parent, lineal ascendants and descendants, and their spouses.
The gift crosses Rs 50,000 from a non-relative: The WHOLE amount is taxable, not just the excess.; The threshold is a cliff, not an allowance.
Received on marriage, under a will, or by inheritance: Exempt regardless of amount or relationship.; Proviso to s.56(2)(x).
A resident gifts to a non-relative NRI: FEMA applies separately from tax. Satisfying s.56(2)(x) does not make it FEMA-compliant.; Two independent regimes: one under the Income-tax Act, one under FEMA.

Commonly got wrong

Only the amount above Rs 50,000 is taxed. The entire sum becomes taxable once the threshold is crossed.Cross Rs 50,000 and the whole gift is taxable.
A cousin is a relative. Cousins are NOT within the statutory definition.Relative means spouse, brother or sister, brother or sister of the spouse, brother or sister of either parent, any lineal ascendant or descendant of you or your spouse, and the spouse of any of these. Cousins are not on the list.

If this matched your situation, these go further

Your founders' agreement has a buyback clause. FEMA has an opinion on the price Your resident director is gone. Here's what actually happens next Your Indian company isn't held in your name, it's held in your holding company's. MCA still wants you named

Gifting shares in your Indian company to a family member or co-founder?

Tell us who's giving and receiving, and how they're related. A practising CA will check both the FEMA and tax relative tests, and handle the filing or RBI approval, on a free call, no obligation.