A process for preparation of diethyl 2-aetamido-2-(4-octyl phenyl)ethyl malonate (III), a key intermediate of fingolimod hydrochloride comprising reaction of 2-(4-octylphenyl)ethyl iodide (IV) with diethyl acetamido malonate in presence of a base and an iodinating agent and in an organic solvent. The compound of formula (III) thus obtained provided fingolimod hydrochloride (Ia) having associated impurities below the regulatory limits.