Rule 11UA: how unquoted shares are valued (and what changed for angel tax)

Rule 11UA of the Income-tax Rules is the method book for putting a number on something with no market price: the fair market value (FMV) of unquoted equity shares. When a private company issues shares, the price it charges is measured against this FMV — so this one valuation is the benchmark almost every Indian equity event is quietly judged against.

Two methods do most of the work. The Net Asset Value (NAV) method is book-based — assets minus liabilities, per share — conservative, cheap, and common for early or asset-light companies. The Discounted Cash Flow (DCF) method values the company on its projected future cash flows, which usually supports a higher number for a growth startup. The catch, since a 2018 amendment: a DCF report can only be signed by a SEBI-registered merchant banker, not a chartered accountant — and the valuation date has to sit within 90 days of the share issue for the report to hold.

For years the reason founders feared this rule was “angel tax” — Section 56(2)(viib), which taxed the amount a company raised above its FMV as the company’s own income. Price your round a rupee too high against a conservative NAV and the excess could be taxed at over 30%. That section was abolished for all classes of investors from financial year 2024-25 (announced in the July 2024 Budget), so the specific angel-tax trap that made Rule 11UA a founder nightmare is gone.

Rule 11UA did not become irrelevant, though. A foreign investor still cannot buy shares below FMV — FEMA pricing guidelines lean on a registered valuer’s number, and clearing FC-GPR with the RBI depends on it. The FMV still matters on the receiving side under Section 56(2)(x), and any serious diligence, ESOP perquisite calculation, or secondary sale wants a defensible valuation on file. The panic is lower; the discipline is the same.