Rule 11UA — Valuation of unquoted shares

Rule 11UA of the Income Tax Rules prescribes how unquoted equity shares are valued for tax purposes — by the Net Asset Value method or the Discounted Cash Flow method — and the resulting fair market value sets the ceiling under Section 56(2)(viib) above which consideration received for a share issue is taxed as income in the hands of the company (the so-called angel tax). DCF valuations must be certified by a merchant banker; NAV can be self-computed from the balance sheet under the prescribed formula.

The valuation report has a limited shelf life for the transaction it supports — practitioners generally treat a report as usable only for allotments reasonably close to its valuation date, and a company raising a round months after its last Rule 11UA report commissions a fresh one rather than relying on stale numbers, since a mismatch between issue price and FMV at the time of allotment is what creates the tax exposure, not the report's date on paper.

Section 56(2)(viib) does not apply to consideration received from persons or classes exempted under government notification — a distinction that matters for foreign investors versus resident investors, and one that has to be checked deal by deal rather than assumed.

The cap table, where Rule 11UA — Valuation of unquoted shares appears as a computed field traced to the ledger event that created it.