FEMA & RBI

Deferred Consideration under FEMA in FDI Share Transfers (2026)

How rule 9(6) of the NDI Rules lets buyers and sellers defer, escrow or indemnify up to 25 percent of the price for 18 months, and how pricing, FC-TRS, escrow accounts, TDS and capital gains timing work.

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FEMA & RBI

CA NandiniCo-founder

17 Feb 2026Published

Reviewed by Nihal Srivastava17 Feb 2026

29 minute read14 questions answered at the end

Krystal7 Consultants · India entry, tax and compliance

Deferred Consideration under FEMA in FDI Share Transfers (2026)

Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.

Rule 9(6) of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 governs deferred consideration. It lets up to 25 percent of the price in a resident to non resident share transfer be paid later. The buyer can defer it, an escrow can hold it, or the seller can indemnify it, each for up to 18 months. The final price must still meet the pricing guidelines. Form FC-TRS is filed on every tranche.

This page covers the three routes in rule 9(6), the clocks, pricing, escrow accounts, indemnity claims and FC-TRS reporting. It also covers TDS, capital gains timing and stamp duty, with two worked deals.

AI Overview Summary

Rule 9(6) of the NDI Rules lets up to 25 percent of the total price in a resident to non resident share transfer be deferred, escrowed or indemnified for up to 18 months.
The deferral and escrow clocks run from the date of the transfer agreement, while the indemnity clock runs from the date the buyer pays the full consideration.
The total consideration finally paid must meet the FEMA pricing guidelines, so an indemnity payout cannot push a sale to a non resident below fair value.
Regulation 4(3)(c) of FEMA 395/2019-RB requires Form FC-TRS on receipt of every tranche of a deferred payment, each within 60 days.
Capital gains arise in the tax year of transfer under section 67 of the Income Tax Act, 2025. Under Hemal Raju Shete (Bombay High Court, 2016), a contingent amount is taxed when it accrues.

FEMA allows part of the price to be paid after the transfer. Rule 9(6) of the NDI Rules caps that part at 25 percent of the total consideration. It applies only to transfers of equity instruments between a person resident in India and a person resident outside India. The time limit is 18 months, and the final price must meet the pricing guidelines.

The NDI Rules give three ways to handle the 25 percent. The buyer pays it on a deferred basis. Or the parties settle it through an escrow arrangement. Or the seller indemnifies it after the buyer has paid in full. The proviso adds that "the total consideration finally paid for the shares must be compliant with the applicable pricing guidelines".

The Master Direction on Foreign Investment repeats this in paragraph 7.9.1. It adds that the share purchase or transfer agreement must contain the clause. So a side letter that defers payment, outside the signed agreement, does not use rule 9(6).

Rule 9(6) does not reach a transfer between two non residents. On our reading, a deferred price between two foreign parties is outside this rule, because no resident is a party. The usual case is a foreign buyer taking shares from Indian founders, or an Indian buyer taking out a foreign investor.

What are the three routes under rule 9(6)?

The three routes are deferred payment by the buyer, an escrow arrangement between buyer and seller, and an indemnity by the seller. Each is capped at 25 percent of the total consideration and 18 months. They differ in who holds the money and in when the 18 month clock starts.

Route	Who holds the money	18 month clock starts	Typical use
Deferred payment, rule 9(6)(i)	Buyer, until it pays	Date of the transfer agreement	Instalments, earn outs, completion accounts adjustments
Escrow, rule 9(6)(ii)	AD bank as escrow agent	Date of the transfer agreement	Warranty holdback, regulatory conditions, tax holdback
Indemnity, rule 9(6)(iii)	Seller, after full payment	Date the buyer pays the full consideration	Post closing warranty and tax claims

On our reading, the 25 percent is one pool for the deal, not 25 percent per route. The rule says "an amount not exceeding twenty five percent of the total consideration" and then lists the routes as alternatives. A deal with 15 percent deferred and 10 percent in escrow sits at the cap.

Total consideration means the full agreed price, including the deferred part. A price of INR 12,00,00,000 allows up to INR 3,00,00,000 under rule 9(6). The upfront part, at least INR 9,00,00,000, is paid at closing.

When does the 18 month clock start?

For deferred payment and escrow, the 18 months run from the date of the transfer agreement, not from closing. For an indemnity, the 18 months run from the date the buyer pays the full consideration. A long gap between signing and closing shortens the time left for a deferred or escrow tranche.

Take a share purchase agreement signed on 10 Mar 2026 that closes on 20 Mar 2026. The last deferred or escrow payment must be made by 10 Sep 2027. If the deal closes only on 10 Dec 2026, the buyer still has only until 10 Sep 2027.

An indemnity works differently. Suppose the buyer pays the full price on 20 Mar 2026. The seller's indemnity under rule 9(6)(iii) can then run to 20 Sep 2027. A claim made after that date falls outside the general permission.

We set the long stop dates in the agreement against these limits. We also put the agreement date and the payment dates in the FC-TRS file, because the AD bank checks them.

How do pricing guidelines apply to deferred and contingent amounts?

The pricing test applies to the total consideration finally paid. A resident selling to a non resident must receive at least fair value. A non resident selling to a resident must receive at most fair value. So every later adjustment must keep the final price on the right side of fair value. That includes an indemnity payout and a missed or extra earn out.

Rule 21 of the NDI Rules defines fair value for an unlisted company as an arm's length valuation under an internationally accepted method. A Chartered Accountant, a SEBI registered merchant banker or a practising cost accountant certifies it. Paragraph 8.11 of the Master Direction says the certificate must not be more than 90 days old on the date of the investment.

Two traps follow from the direction of the deal:

Resident seller, non resident buyer. The price has a floor. If the headline price is close to fair value, a large warranty claim paid from escrow can take the final price below the floor. Cap the claims at the headroom above fair value.
Non resident seller, resident buyer. The price has a ceiling. An earn out that pays more if targets are hit can push the final price above fair value. Cap the earn out so the maximum total stays at or below fair value.

Paragraph 8.3.2 of the Master Direction adds a guiding principle. A non resident investor is not guaranteed any assured exit price when it invests. It exits at the price prevailing at the time of exit. A deferred mechanism that works like a guaranteed return for the foreign buyer raises this issue.

For valuation methods and certificates, see FEMA pricing guidelines for share issue and transfer.

Deal structure	Fits rule 9(6)?	Pricing check	FC-TRS events	Seller's tax timing
100 percent at closing	Not needed	Price at closing	One filing	Tax year of transfer
75 percent at closing, 25 percent fixed instalment within 18 months	Yes, deferred route	Total fixed price	Closing and the instalment	Tax year of transfer, on the full price
75 percent at closing, 25 percent earn out within 18 months	Yes, if the agreement contains it	Maximum and minimum totals both inside the rule	Closing and each earn out payment	Contingent part when it accrues
80 percent at closing, 20 percent in escrow for warranty claims	Yes, escrow route	Final price after claims	Closing and the escrow release	Depends on whether release is contingent
100 percent at closing, seller indemnity up to 25 percent	Yes, indemnity route	Final price after any payout	Closing; then the payout, if any	Tax year of transfer; payout needs review
60 percent at closing, 40 percent deferred	No, above 25 percent	Not tested	Needs RBI approval first	Not reached
25 percent deferred for 24 months	No, beyond 18 months	Not tested	Needs RBI approval first	Not reached

A resident or non resident acquirer can open an escrow account in INR with an Authorised Dealer (AD) bank acting as escrow agent. Regulation 5(5) of the FEMA Deposit Regulations, 2016 and its Schedule 5 permit it. The account is non interest bearing, carries no fund or non fund facility, and runs for the rule 9(6) period.

The Deposit Regulations let resident or non resident acquirers open an escrow account with an AD bank, subject to Schedule 5. The Master Direction on Deposits and Accounts sets the operating rules in Part II, paragraph 8. Transactions must follow the NDI Rules and any SEBI regulations.

Paragraph 7.10 of the Master Direction on Foreign Investment adds the funding rule. The non resident can fund the escrow by inward remittance through banking channels, by a guarantee from an AD bank, or both. Paragraph 7.10.2 still names the Guarantees Regulations, 2000. RBI replaced those with the Guarantees Regulations, 2026 (FEMA 8(R)/2026-RB of 6 Jan 2026). We read the reference as one to the 2026 regulations.

Feature	Rule	Source
Who may open	Resident or non resident acquirers	Regulation 5(5), Deposit Regulations, 2016
Currency	INR	Part II para 8.1, Master Direction on Deposits and Accounts
Bank	An AD bank in India acting as escrow agent	Part II para 8.1
Interest	Non interest bearing	Part II para 8.3
Loans against the balance	Not permitted, fund based or non fund based	Part II para 8.4
Funding by a non resident	Inward remittance and, or, an AD bank guarantee	Para 7.10.2, Master Direction on Foreign Investment
Period for an FDI holdback	Up to 18 months from the transfer agreement	Rule 9(6)(ii), NDI Rules
Listed company deals	SEBI regulations govern the escrow	Para 7.10.3, Master Direction on Foreign Investment

Most banks want a tri partite escrow agreement with clear release triggers before they open the account. We draft release on joint instructions, on a fixed date, or on a tribunal or court order. An open ended "release when the buyer is satisfied" clause slows the bank's approval and risks the 18 month limit.

Can the seller give an indemnity, and how is a claim paid?

Yes. Rule 9(6)(iii) lets the seller indemnify up to 25 percent of the price for 18 months after the buyer pays in full. The buyer must have paid the whole price first. A claim paid under the indemnity reduces the final price, so it must keep the price within the pricing guidelines.

When a resident seller pays an indemnity claim to a non resident buyer, money leaves India. The AD bank treats it as part of the FDI transaction under rule 9(6)(iii). So it checks the agreement clause and the original FC-TRS. When a non resident seller pays a resident buyer, the money comes into India through banking channels.

An indemnity beyond 25 percent or beyond 18 months is common in global deal templates. Under FEMA it needs prior RBI approval, on our reading. We cut the general indemnity to fit rule 9(6). For larger risks, we use warranty and indemnity insurance taken out by the buyer, which does not move money between the parties.

How is each tranche reported in Form FC-TRS?

Form FC-TRS is due within 60 days of the transfer or of the receipt or remittance of funds, whichever is earlier. For a rule 9(6) deal, regulation 4(3)(c) of FEMA 395/2019-RB requires a filing on receipt of every tranche. The resident party, transferor or transferee, carries the reporting duty.

The FEMA 395 regulations set this in regulation 4(3). Where a non resident holding on a non repatriable basis transfers to a non resident holding on a repatriable basis, the non repatriable holder reports. A sale by a non repatriable holder to a resident needs no FC-TRS. Each FC-TRS goes to the AD bank through RBI's FIRMS portal with the agreement, valuation certificate and remittance proof.

Event	FC-TRS due	Filed by	Attachments we include
Closing, upfront payment	60 days from transfer or receipt of funds, whichever is earlier	Resident transferor or transferee	Agreement, valuation certificate, FIRC or remittance proof, SH-4 or demat proof
Each deferred instalment or earn out payment	60 days from receipt of that tranche	Same resident party	Payment proof, link to the first FC-TRS, earn out working
Escrow release to the seller	60 days from the release	Same resident party	Escrow agent's release letter
Indemnity payout	Not fixed by regulation 4(3); agree it with the AD bank before paying	Same resident party	Claim notice, payout proof, revised price working

Regulation 4(3)(c) speaks of "every tranche of payment" for the price. It does not say whether a refund under an indemnity needs a fresh FC-TRS or a revision of the earlier one. Ask the AD bank in writing before the payout, and keep its reply in the transaction file.

A late FC-TRS attracts a late submission fee under A.P. (DIR Series) Circular No. 16 of 30 Sep 2022. We explain the formula in late submission fee for FEMA reporting. The general process for a transfer sits in our guide to share transfer between a resident and a non resident. For how FC-TRS differs from FC-GPR, see FC-GPR vs FC-TRS.

What if the deal needs more than 25 percent or more than 18 months?

Rule 9(6) is a general permission with fixed limits. A deal that defers more than 25 percent of the price, or that runs any route beyond 18 months, is outside it. On our reading, such a deal needs prior RBI approval through the AD bank before signing, or a restructured price.

We see three ways to stay within the rule:

Split the deal into two transfers, each with its own price and agreement, with the second at a fair value tested at that time.
Move part of the risk into warranty and indemnity insurance.
Shorten the earn out to end inside 18 months from the agreement date.

The first option has a cost. The second transfer needs a fresh valuation and its own FC-TRS. It also gives the parties a fresh price test that may not suit them.

When is capital gains tax payable on deferred consideration?

Section 67 of the Income Tax Act, 2025 charges capital gains in the tax year in which the transfer takes place. A fixed deferred amount is part of the full value of consideration in that year, even if paid later. A contingent amount that may never be paid accrues only when the contingency is met.

The Bombay High Court took this view in CIT v Mrs. Hemal Raju Shete, decided on 29 Mar 2016 and reported at 239 Taxman 176. The deferred part of the price there depended on the company's future profits and had a cap. The court held that it had not accrued in the year of transfer, because the seller had no right yet to receive any fixed amount. Take the certified copy from the Bombay High Court website before you cite it in a submission.

The principle carries over to the 2025 Act, because the charging rule is the same in substance. A transfer made on or before 31 Mar 2026 stays under section 45 of the Income Tax Act, 1961, even if tranches arrive later.

Escrow amounts need care. If the escrow holds a fixed price and only secures payment, the amount accrues at transfer. Sometimes release depends on events that may not happen, such as no warranty claims or a regulatory approval. Then the stronger view is that it accrues on release. We record the reasoning in the tax file in the year of sale.

An indemnity payout after the year of sale is harder. We have not found a provision in the Income Tax Act, 2025 that reopens the earlier gain for a later payout. So we prefer to hold claim money in escrow, where the gain follows the release, instead of relying on a later indemnity. A seller who pays an indemnity in a later year should take tax advice before it claims a reduction.

Price below fair value for income tax raises two more points. Section 92(2)(m) taxes a buyer who acquires shares below fair market value, measured under rule 57 of the Income Tax Rules, 2026. A seller of unquoted shares can be taxed on fair market value instead of the price. Section 79 of the Income Tax Act, 2025 does this, in place of section 50CA of the 1961 Act. The FEMA fair value and the income tax fair value can differ, so we test both.

For the rates and computation on a sale by a foreign investor, see tax on sale of unlisted shares by non residents.

How does TDS work when a non resident seller is paid in tranches?

The buyer deducts tax under section 393(2) of the Income Tax Act, 2025 when it credits or pays the amount, whichever is earlier. Serial 17 of the table covers "any other sum chargeable", so TDS applies to the gain portion of each payment. Booking the full deferred liability to the seller's account at closing triggers TDS on it at closing.

Section 393(11) says that a credit to a suspense account counts as a credit to the payee. So a buyer that records the deferred price in an "escrow payable" ledger has credited it. We match the accounting entries to the TDS plan before closing. Our guide to TDS on payments to non residents covers rates and statements.

A seller with a low gain can ask for a lower deduction certificate in Form 128 under section 395(1). Our guide to lower deduction certificates in Form 128 covers the process. Before each remittance, the buyer files Form 145 and, where needed, the accountant's Form 146, under section 397(3)(d) and rule 220. See Forms 145 and 146.

A resident seller paid by a foreign buyer suffers no TDS on the sale. The seller pays advance tax under section 408 on the gain, in the instalments that fall after the sale.

What stamp duty applies, and on which amount?

Stamp duty on a transfer of shares is 0.015 percent of the consideration. The transferor pays it under section 9A(1)(b) of the Indian Stamp Act, 1899. For a demat transfer, the depository collects it. On our reading, the duty is on the full price stated in the transfer, including the deferred part.

A price of INR 12,00,00,000 attracts duty of INR 18,000. For a physical transfer, the duty goes on the share transfer form SH-4. For a demat transfer, the depository collects it when the shares move. Either way, the seller bears the cost unless the agreement shifts it.

What changed in 2026

The rule 9(6) limits did not change in 2026. The changes are in the surrounding law. The Income Tax Act, 2025 took effect on 1 Apr 2026. The Guarantees Regulations, 2026 replaced the 2000 regulations that govern bank guarantees funding an escrow. This page carries a publish date of 17 Feb 2026, and the text states the law as on 23 Oct 2026.

Old rule	New rule	Date	Instrument
TDS on payments to a non resident seller under section 195, Income Tax Act, 1961	Section 393(2), serial 17	1 Apr 2026	Income Tax Act, 2025
Capital gains charged under section 45	Section 67	1 Apr 2026	Income Tax Act, 2025
Lower deduction certificate in Form 13	Form 128 under section 395(1)	1 Apr 2026	Income Tax Rules, 2026
Forms 15CA and 15CB	Forms 145 and 146	1 Apr 2026	Income Tax Rules, 2026
Shares received below fair value, section 56(2)(x)	Section 92(2)(m)	1 Apr 2026	Income Tax Act, 2025
Fair market value deemed as the seller's price for unquoted shares, section 50CA	Section 79	1 Apr 2026	Income Tax Act, 2025
Fair market value under rule 11UA	Rule 57	1 Apr 2026	Income Tax Rules, 2026
Guarantees Regulations, 2000 (FEMA 8/2000-RB) for escrow guarantees	Guarantees Regulations, 2026, in supersession of FEMA 8/2000-RB	6 Jan 2026 (notification date)	FEMA 8(R)/2026-RB
Mode of payment table in regulation 3.1 of FEMA 395/2019-RB	Entries for NRI and OCI repatriable investment and for Indian companies listed abroad substituted; regulation 4(9) on Form LEC (IFI) replaced; regulation 4(3) on FC-TRS unchanged	13 Jun 2026	FEMA 395(4)/2026-RB

The FEMA 395 amendment of 13 Jun 2026 did not touch regulation 4(3). The NDI Rules, as updated on rbi.org.in up to 2 Sep 2026, keep rule 9(6) in the same words.

Worked example

Deal 1. An Indian founder sells to a foreign buyer with escrow. A resident individual founder sells a 30 percent stake in an Indian Private Limited company to a US company. The figures are illustrative.

The parties sign the share purchase agreement on 10 Apr 2026 at INR 12,00,00,000.
A Chartered Accountant certifies fair value of the stake at INR 11,50,00,000 on 1 Apr 2026.
The buyer pays INR 9,00,00,000 at closing on 20 Apr 2026.
INR 1,50,00,000 is a fixed instalment due on 10 Apr 2027.
INR 1,50,00,000 goes into an INR escrow for warranty claims. It is released on 9 Oct 2027, inside the 18 months ending 10 Oct 2027.

Item	Working	INR
Total consideration	Agreed price	12,00,00,000
Rule 9(6) cap	25 percent of 12,00,00,000	3,00,00,000
Deferred plus escrow	1,50,00,000 + 1,50,00,000	3,00,00,000 (at the cap)
Fair value floor	CA certificate	11,50,00,000
Headroom for warranty claims	12,00,00,000 minus 11,50,00,000	50,00,000
Claim of 80,00,000 paid from escrow	Final price 11,20,00,000	Below floor, breach
Claim capped at 50,00,000	Final price 11,50,00,000	At floor, compliant
Stamp duty at 0.015 percent	12,00,00,000 × 0.015 percent	18,000 (paid by the founder)

The agreement therefore caps warranty claims from the escrow at INR 50,00,000. The FC-TRS dates follow the cash. The closing FC-TRS is due by 19 Jun 2026, 60 days from 20 Apr 2026. The instalment FC-TRS is due by 9 Jun 2027. The escrow release FC-TRS is due by 8 Dec 2027. The founder files each one, as the resident transferor.

The founder's cost is INR 1,00,00,000, for shares held for more than 24 months. If the whole price accrues in tax year 2026-27, the long term gain is INR 11,00,00,000. At 12.5 percent, the tax is INR 1,37,50,000 before surcharge and 4 percent cess. If the escrow release depends on no claims, the stronger view moves INR 1,50,00,000 of the gain to the release year.

Deal 2. A foreign investor sells to an Indian buyer with an earn out. A Singapore company sells its stake in an Indian Private Limited company to an Indian company. The price is INR 30,00,00,000 at closing plus up to INR 10,00,00,000 payable 12 months after the agreement. Fair value is INR 41,00,00,000, so the maximum total of INR 40,00,00,000 stays under the ceiling. The later amount is exactly 25 percent of the maximum total. The table compares a fixed deferred price with a contingent earn out of the same size.

The seller's cost is INR 15,00,00,000 and the shares are long term. The seller has other Indian income, so its total income is above INR 10 crore in each year. As a foreign company, it pays 12.5 percent plus 5 percent surcharge and 4 percent cess, an effective 13.65 percent.

Item (INR)	Fixed deferred price (accrues at transfer)	Contingent earn out (accrues when met)
Gain in the year of transfer	40,00,00,000 minus 15,00,00,000 = 25,00,00,000	30,00,00,000 minus 15,00,00,000 = 15,00,00,000
Tax in the year of transfer at 13.65 percent	3,41,25,000	2,04,75,000
Gain in the year the later amount is paid	Nil	10,00,00,000
Tax in that later year at 13.65 percent	Nil	1,36,50,000
Total tax if the full later amount is paid	3,41,25,000	3,41,25,000
TDS on the closing payment	Gain share of 30,00,00,000 is 62.5 percent: 18,75,00,000 × 13.65 percent = 2,55,93,750	15,00,00,000 × 13.65 percent = 2,04,75,000
TDS on the later payment	6,25,00,000 × 13.65 percent = 85,31,250	10,00,00,000 × 13.65 percent = 1,36,50,000

The total tax is the same either way. The timing and the TDS on each payment differ. The proportional split of the gain across payments in the first column is our working method, not a rule in the Act. The Indian buyer files Form FC-TRS on closing and again within 60 days of paying the later amount. It also files Form 145 and Form 146 before each remittance.

Common mistakes

Deferring more than 25 percent. The cap is on the total consideration, across all routes. Fix: add up deferred, escrow and indemnity amounts before you sign.
Counting 18 months from closing. Deferral and escrow run from the agreement date. Fix: set the long stop date by the agreement date.
Letting claims break the price floor. A large indemnity or escrow claim can take a sale to a non resident below fair value. Fix: cap claims at the headroom above fair value.
Earn outs that break the ceiling. A sale by a non resident cannot exceed fair value. Fix: test the maximum possible total against the certificate.
Keeping the deferral in a side letter. Paragraph 7.9.1 of the Master Direction wants the clause in the transfer agreement. Fix: put every deferral, escrow and indemnity term in the signed agreement.
Filing only one FC-TRS. Regulation 4(3)(c) wants a filing on every tranche. Fix: diarise 60 days from each payment date.
Opening a foreign currency escrow. The Master Direction on Deposits and Accounts provides for an INR escrow. Fix: open the escrow in INR with an AD bank in India.
Booking the deferred price to the seller at closing without TDS. Section 393(2) taxes the credit. Fix: plan the ledger entries and TDS together.
Using a stale valuation. The certificate must not be more than 90 days old. Fix: date the valuation close to the agreement and closing.

To set up the transfer documents and filings, see our share transfer service.

Checklist

Confirm that one party is resident in India and the other resident outside India.
Obtain a fair value certificate under rule 21 dated within 90 days of the transfer.
Fix the total consideration and the split between upfront, deferred, escrow and indemnity.
Check that the deferred, escrow and indemnity amounts together stay within 25 percent.
Set each payment and release date within 18 months of the agreement, or of full payment for the indemnity.
Test the lowest and highest possible final price against the pricing floor or ceiling.
Write every deferral, escrow and indemnity clause into the share purchase agreement.
Open the INR escrow with an AD bank and sign the escrow agreement with release triggers.
Plan TDS under section 393(2), Form 128 if needed, and Forms 145 and 146 before each remittance.
Pay stamp duty at 0.015 percent on the transfer.
File Form FC-TRS within 60 days of closing and of every later tranche.
Record the tax view on fixed and contingent amounts in the seller's file for the year of sale.

Key terms

Deferred consideration: The part of a share price that the buyer pays after the transfer. Under rule 9(6) of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019, up to 25 percent of the total price in a resident to non resident transfer can be deferred for up to 18 months from the transfer agreement.
Escrow account (FDI): An INR account with an Authorised Dealer bank acting as escrow agent, opened by a resident or non resident acquirer under regulation 5(5) and Schedule 5 of the FEMA Deposit Regulations, 2016. It is non interest bearing, carries no loans against its balance, and follows the NDI Rules.
Seller indemnity (FEMA): A seller's promise to repay part of the price if warranties prove untrue. Rule 9(6)(iii) of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 allows a seller in a resident to non resident transfer to indemnify up to 25 percent of the total price for up to 18 months after the buyer pays in full.
Form FC-TRS: The report on the FIRMS portal of a transfer of equity instruments between a resident and a person resident outside India. The resident party files it through its AD bank within 60 days of the transfer or of receiving the funds, whichever is earlier, under regulation 4(3) of FEMA 395/2019-RB. Deferred consideration needs a filing on every tranche.
Pricing guidelines (FEMA): Rule 21 of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 sets the price floor and ceiling for unlisted shares. A resident selling to a non resident must receive at least fair value. A non resident selling to a resident may receive at most fair value, certified by a Chartered Accountant, SEBI registered merchant banker or practising cost accountant.
Earn out: A part of the price that depends on the company's later performance. FEMA has no separate earn out rule. In a transfer between a resident and a non resident, the earn out must fit within the 25 percent and 18 month limits of rule 9(6) of the NDI Rules, and the final price must meet the pricing guidelines.

See the full glossary

Frequently Asked Questions

What is deferred consideration under FEMA?

Deferred consideration is the part of a share price paid after the transfer. Rule 9(6) of the NDI Rules covers transfers between a resident and a non resident. It allows up to 25 percent of the total price to be deferred for 18 months from the transfer agreement. The final price must meet the pricing guidelines.

How much of the price can be deferred in an FDI share transfer?

Up to 25 percent of the total consideration. Rule 9(6) of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 sets this cap for deferred payment, escrow and indemnity. On our reading, the 25 percent is one pool for the deal, so the three routes together cannot exceed it without RBI approval.

From when is the 18 month period counted?

For deferred payment and escrow, rule 9(6) counts 18 months from the date of the transfer agreement. For an indemnity under rule 9(6)(iii), it counts 18 months from the date the buyer pays the full consideration. A gap between signing and closing reduces the time left for deferred and escrow payments.

Can an earn out be used when a foreign investor buys shares in India?

Yes, as deferred consideration under rule 9(6) of the NDI Rules. The earn out must be in the transfer agreement and stay within 25 percent of the total consideration. It must be paid within 18 months of the agreement. The minimum and maximum final prices must both meet the pricing guidelines.

Who can open an escrow account for an FDI share transfer?

A resident or non resident acquirer can open it with an Authorised Dealer bank in India acting as escrow agent. Regulation 5(5) and Schedule 5 of the FEMA Deposit Regulations, 2016 permit it. The Master Direction on Deposits and Accounts says the account is in INR, non interest bearing and carries no loans against its balance.

Can a non resident fund the escrow with a bank guarantee?

Yes. Paragraph 7.10.2 of the Master Direction on Foreign Investment allows funding by inward remittance, an AD bank guarantee, or both. The guarantee now falls under the Guarantees Regulations, 2026 (FEMA 8(R)/2026-RB of 6 Jan 2026). They replaced the 2000 regulations.

Is Form FC-TRS filed for each deferred payment?

Yes. Regulation 4(3)(c) of FEMA 395/2019-RB requires Form FC-TRS on receipt of every tranche in a rule 9(6) transfer. Each filing is due within 60 days of that tranche. The resident transferor or transferee files it with the AD bank on RBI's FIRMS portal.

Can an indemnity payout reduce the price below fair value?

No, not for a resident selling to a non resident. Rule 9(6) requires the total consideration finally paid to meet the pricing guidelines. For such a sale, the floor is fair value under rule 21. A payout that takes the final price below the certified fair value breaches FEMA, so the agreement should cap claims.

What happens if the deferral is more than 25 percent?

The deal falls outside the general permission in rule 9(6) of the NDI Rules. On our reading, it needs prior RBI approval through the AD bank, or the parties restructure it. Common fixes are splitting the deal into two transfers at separate fair values or moving risk into warranty and indemnity insurance.

When is capital gains tax due on deferred consideration?

Section 67 of the Income Tax Act, 2025 charges the gain in the tax year of transfer. A fixed deferred amount is taxed in that year. A contingent amount, such as an earn out tied to profits, accrues only when the contingency is met. The Bombay High Court applied this in Hemal Raju Shete in 2016.

Does the buyer deduct TDS on deferred payments to a non resident seller?

Yes. Section 393(2) of the Income Tax Act, 2025 requires TDS at credit or payment, whichever is earlier, on the chargeable gain portion. A credit to a suspense or escrow payable ledger counts as a credit under section 393(11). The seller can seek a lower deduction certificate in Form 128 under section 395(1).

Who pays stamp duty on an FDI share transfer with deferred consideration?

The seller pays. Section 9A(1)(b) of the Indian Stamp Act, 1899 puts the duty on the transferor at 0.015 percent of the consideration. On our reading, it applies to the full agreed price, including deferred and escrow amounts. The depository collects it on a demat transfer.

Does rule 9(6) apply when both parties are non residents?

No. Rule 9(6) of the NDI Rules covers transfers between a person resident in India and a person resident outside India. A transfer between two non residents is outside it, on our reading, so their deferral terms are not capped by this rule. Check the tax position separately, because the gain can still be taxable in India.

Can the escrow be kept in US dollars?

The Master Direction on Deposits and Accounts provides for an escrow account in INR with an AD bank in India for these transfers. A non resident funds it by inward remittance, which the bank converts into INR. The foreign buyer therefore carries the exchange risk on the escrowed amount until release.

Sources

Reserve Bank of India, Foreign Exchange Management (Non Debt Instruments) Rules, 2019, updated up to 2 Sep 2026, https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083
Reserve Bank of India, Master Direction on Foreign Investment in India, updated up to 15 Jun 2026, https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200
Reserve Bank of India, Foreign Exchange Management (Mode of Payment and Reporting of Non Debt Instruments) Regulations, 2019, amended up to 13 Jun 2026, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0
Reserve Bank of India, FEMA 395(4)/2026-RB, 13 Jun 2026, https://rbi.org.in/ScriptS/BS_FemaNotifications.aspx?Id=13484
Reserve Bank of India, Foreign Exchange Management (Deposit) Regulations, 2016, amended up to 29 Jun 2026, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10325&Mode=0
Reserve Bank of India, Master Direction on Deposits and Accounts, updated as on 2 Sep 2026, https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10198
Reserve Bank of India, Foreign Exchange Management (Guarantees) Regulations, 2026, FEMA 8(R)/2026-RB, 6 Jan 2026, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=13269&Mode=0
Income Tax Department, Income Tax Act, 2025, section 393, https://www.incometaxindia.gov.in/w/section-393-6
Income Tax Department, Income Tax Act, 2025, section 70 (refers to section 67 as the capital gains charge), https://www.incometaxindia.gov.in/w/section-70-127
Income Tax Department, Income Tax Act, 2025, section 79 (full value of consideration for unquoted shares), https://www.incometaxindia.gov.in/w/section-79-119
Bombay High Court, CIT v Mrs. Hemal Raju Shete, judgment of 29 Mar 2016 (239 Taxman 176), official judgments at https://bombayhighcourt.nic.in

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CA Nandini

Co-founder · All India Rank 49, ICAI

Nandini Hasija is a co-founder of Krystal7. She leads brand, business development and marketing, and works with founders to define their engagement. She is a Chartered Accountant and achieved All India Rank 49 in the CA examinations.

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