Section 506 of the Income-tax Act, 2025 — Furnishing of Information by an Indian Concern in Indirect Transfer Cases (Form 163)

In plain language

What Section 506 actually says

There is a common misconception that Section 506 deals with the Statement of Financial Transaction (SFT). It does not. Section 506 of the Income-tax Act, 2025 is the re-enactment of the old Section 285A of the Income-tax Act, 1961. It creates a reporting obligation on an Indian concern when there has been an indirect transfer of Indian assets — that is, when shares of, or an interest in, a company or entity incorporated outside India are transferred, and that foreign share/interest derives its value substantially from assets located in India held through or in that Indian concern.

In plain words: if a foreign holding company that ultimately owns Indian business assets is sold abroad, the Indian company sitting under that structure must report the details to the Indian tax authority — even though the Indian company itself did not sell anything.

Who it applies to

• The reporting person is the "Indian concern" — the Indian company, LLP or entity through or in which the offshore assets located in India are held. The seller is a non-resident, but the compliance burden falls on the Indian entity (or its authorised representative).
• Trigger event: a transfer of share/interest of a foreign company/entity that derives its value substantially from Indian assets, per the deeming rule in Section 9 (the successor to Section 9(1)(i) Explanation 5 of the 1961 Act).
• Not limited to management/control change — the report is required whenever the substantial-value test is met, but a higher penalty applies where management or control is transferred.

The "substantial value" test (the key condition)

The foreign share/interest is treated as deriving value substantially from Indian assets only if both limbs are satisfied on the specified date:

• Value limb: the fair market value (FMV) of the assets located in India exceeds ₹10 crore; and
• Proportion limb: those Indian assets represent at least 50% of the FMV of all the assets of the foreign company/entity.

FMV is computed under valuation rules (the 2025-Act successor to Rule 11UB), typically requiring a SEBI Category-I merchant banker or accountant. A small-shareholder exemption protects a transferor holding less than 5% (with no management/control rights) throughout the preceding 12 months.

The form and the time limit

• The report is filed in the prescribed form — Form 163 under the Income-tax Rules, 2026 (the successor to Form 49D under Rule 114DB of the 1961 regime).
• Time limit: within 90 days from the end of the tax year in which the transfer takes place; but where the transfer has the effect of directly or indirectly transferring the rights of management or control of the Indian concern, it must be filed within 90 days of the date of the transaction.

How it interacts with other provisions

• Section 9 (income deemed to accrue in India): supplies the "substantially derives value from Indian assets" definition that Section 506 relies on. Section 506 is purely a reporting hook; the actual capital-gains charge on the non-resident sits in Section 9 and the capital-gains provisions.
• Penalty provision: failure to comply attracts a penalty (successor to Section 271GA of the 1961 Act) — 2% of the value of the transaction where management/control is transferred, and ₹5,00,000 in any other case.
• Reasonable-cause relief: no penalty is levied if the Indian concern proves reasonable cause for the failure (successor to Section 273B).

Practical implications

• Indian subsidiaries of multinational groups must track offshore share transfers up their ownership chain, because a deal signed entirely abroad can create an Indian filing duty for them.
• The information sought is detailed: group structure, immediate/intermediate/ultimate holding entities, foreign entities deriving value from India, valuation and the change in ownership or control.
• Form 163 is a reporting mechanism, not a tax-payment form — but non-filing is expensive and the liability rests on the Indian entity, so board/CFO-level tracking of group M&A is advisable.