I returned to India from the UK in March 2022 after working there for nearly 10 years. I continue to hold the savings that I accumulated during my residence abroad in my UK bank account. In March 2026, I used a portion of those funds to invest in a private technology startup incorporated in the USA by acquiring shares from early-stage investors in a privately negotiated secondary transaction. Will this investment give rise to any tax liability in India, given that I have used my overseas funds?
– Name withheld on request
Since you have been living in India since March 2022, I assume that you are a Resident and Ordinarily Resident (ROR) in India for FY2025-26. As you made the investment in the US-based unlisted technology startup in March 2026, the tax implications will be governed by the Income-tax Act, 1961. The Income-tax Act, 2025 will not apply because it comes into effect only from 1 April 2026.
Simply buying shares of a foreign company does not normally result in any tax liability in India. However, there is one important exception.
If you acquire the shares for a price lower than their fair market value (FMV), and the difference between the FMV and the price paid exceeds ₹50,000, the difference will be taxed in India under Section 56(2)(x) of the Income-tax Act, 1961. This rule applies even when the shares are of a foreign company.
As the investment was made in March 2026, the FMV of the US company shares must be determined under the Income-tax Rules, 1962, using the prescribed valuation method. In this case, the prescribed method broadly resembles a modified Net Asset Value (NAV) approach.
If any amount becomes taxable under Section 56(2)(x), it will be taxed under the head "Income from Other Sources" at the applicable slab rates, along with surcharge and health and education cess.
The good part is that the FMV will also become the cost of acquisition for calculating capital gains when you sell the shares in the future. This ensures the same amount is not taxed twice.
FEMA rules
From a FEMA perspective, a resident in India is allowed to use foreign assets acquired while they were a non-resident to make fresh investments outside India.
Therefore, your investment does not require any FEMA approval, reporting or other compliance.
Although there is no FEMA reporting requirement, the shares of the US company will be treated as a foreign asset.
As long as you remain a ROR in India, you will be required to disclose this investment every year in Schedule FA of your Indian income-tax return.
Failure to disclose a foreign asset can attract stringent penalties under the Black Money Act.
Harshal Bhuta is partner at P. R. Bhuta & Co. CAs.
