Last reviewed: 25 September 2026. Angel tax is dead — Section 56(2)(viib) stopped applying to any investor class from AY 2025-26, i.e. share issues in FY 2024-25 onward (Finance (No.2) Act 2024), and the Income-tax Act, 2025 has no equivalent — and a lot of founders have quietly concluded that valuation itself is no longer their problem. It still is. Every priced funding round, ESOP grant, related-party share transfer, buyback, family settlement, or foreign investment still runs into a valuation requirement under some combination of the Income-tax Act, the Companies Act, 2013 and FEMA, each with its own method, its own valid signatory, and its own paper trail. Pick the wrong method or let the wrong professional sign the wrong certificate, and the transaction itself — not just a tax return — is what's exposed. This is the reference we point clients to before they approach a valuer, structured around the question that actually matters: which valuation, by whom, for what. For transactions from 1 April 2026 we cite the Income-tax Act, 2025 section first, with the 1961 section in brackets.
- Why valuation still matters after angel tax's exit
- The three valuation approaches, side by side
- Rule 11UA in detail: NAV, DCF and who can sign
- Worked example: DCF for a funding round
- Worked example: NAV/FMV for an ESOP exercise
- FEMA pricing when a non-resident is involved
- Companies Act Section 247: when you need a Registered Valuer
- Valuation-readiness checklist
- Frequently asked questions
Why valuation still matters after angel tax's exit
Section 56(2)(viib) — the provision that taxed a closely-held company on share premium received above fair market value from a resident investor — was omitted with effect from AY 2025-26, so it does not apply to shares issued in FY 2024-25 or later, for resident and non-resident investors alike. That closes one chapter, but Rule 11UA (the valuation machinery Section 56(2)(viib) borrowed) was never written for that section alone, and it keeps working elsewhere:
| Trigger | Who is taxed / regulated | Valuation basis |
|---|---|---|
| Section 92(2)(m) (old 56(2)(x)) — any person receiving unquoted shares for inadequate/no consideration | The recipient (individual, firm, company — not just a company issuing shares) | Rule 11UA(1)(c)(b) adjusted NAV FMV vs consideration paid |
| Section 79 (old 50CA) — transfer of unquoted shares below FMV | The transferor, as deemed full value of consideration for capital gains | Rule 11UA(1)(c)(b) adjusted NAV FMV, deemed sale price |
| ESOP exercise — section 17(1)(d) (old 17(2)(vi)) | The employee, as a salary perquisite | Merchant-banker FMV, unlisted company |
| Companies Act Sec 62(1)(c), 230-232, 236, 281 | The company / shareholders in the specified corporate action | IBBI Registered Valuer's report |
| FEMA (NDI Rules) Rule 21 | Pricing floor/ceiling on the non-resident leg of the deal | Internationally accepted pricing method, CA/merchant banker/cost accountant |
In practice this means a single funding round with a foreign lead investor, an ESOP pool top-up and a co-founder share transfer in the same quarter can genuinely need three separate valuation exercises, by three differently-qualified professionals, dated against three different rules. Scoping that correctly before you engage anyone saves a re-do.
The three valuation approaches, side by side
Every method used across Income-tax, Companies Act and FEMA work reduces to one of three underlying approaches. Knowing which one fits your company's stage avoids paying for the wrong report.
| Approach | Core idea | Fits best | Typical signatory |
|---|---|---|---|
| Asset approach (NAV) | Value = net assets at book/fair value, no forecast needed | Holding companies, NBFCs, real-estate SPVs, early-stage cos with no meaningful cash flows yet | Chartered Accountant |
| Income approach (DCF) | Value = present value of projected free cash flows + terminal value | Growth-stage startups, SaaS, services businesses where earnings power drives value | CA, SEBI Merchant Banker or Cost Accountant for FEMA pricing; merchant banker for ESOP FMV |
| Market approach (CCM / comparable transactions / market price) | Value = multiples or prices observed in comparable listed peers or recent deals | Sanity-checking a DCF, FEMA pricing, sectors with active M&A comparables | CA / Merchant Banker / Cost Accountant depending on the statute |
Most credible valuation reports triangulate — run a primary method (DCF for a growth business) and cross-check it against a second (comparable transaction multiples), then explain any gap rather than silently averaging the two.
Rule 11UA in detail: NAV, DCF and who can sign
Rule 11UA has two parts that are easy to mix up:
- Adjusted NAV — Rule 11UA(1)(c)(b): FMV per share = (book value of assets, with jewellery/art/shares and securities/immovable property taken at fair or stamp-duty value, minus book value of liabilities) × paid-up value of the share ÷ total paid-up equity capital. This is the income-tax FMV for unquoted equity under section 92(2)(m) (old 56(2)(x)) and section 79 (old 50CA). There is no merchant-banker DCF option for these provisions. It is a formula computation; in practice a Chartered Accountant prepares and certifies it.
- NAV or DCF — Rule 11UA(2): the choice between a book-value NAV and a Discounted Free Cash Flow valuation by a SEBI-registered Category I Merchant Banker applied for the former angel-tax provision, Section 56(2)(viib). After its omission, Rule 11UA(2) has no live income-tax trigger for share issues. It matters mainly for open assessments of earlier years.
The same applies to Rule 11UA(3), which let the assessee treat a merchant banker's DCF report dated not more than ninety days before the issue of shares as the valuation date: it was part of the angel-tax machinery and now matters mainly for earlier years.
One more thing worth knowing even though it's now largely historical: in September 2023, CBDT notified five additional valuation methods (Comparable Company Multiple, Probability Weighted Expected Return, Option Pricing, Milestone Analysis, and Replacement Cost) specifically for shares issued to non-resident investors under the erstwhile angel-tax provision. Since Section 56(2)(viib) no longer applies, these five methods have lost their live trigger for new transactions — but they can still surface in a reassessment or appeal touching share premium received in FY 2023-24 and earlier, so don't assume they're irrelevant to a company with an open assessment from those years.
Rule numbers above are those of the Income-tax Rules, 1962. The Income-tax Rules, 2026 carry the valuation provisions under new numbers; confirm the current rule reference for transactions from 1 April 2026 before relying on it.
A SaaS company projects free cash flows of −₹40 lakh, ₹10 lakh, ₹90 lakh, ₹2.1 crore and ₹3.6 crore over the next five years, with perpetual growth of 5% after year five. At a WACC of 22% (a growth-stage discount rate reflecting execution and market risk), the present value of the five explicit-year cash flows works out to roughly ₹2.5 crore. The terminal value at the end of year five is ₹3.6 crore × 1.05 ÷ (22% − 5%), or about ₹22.2 crore, which discounts back to about ₹8.2 crore today. That gives a total enterprise value of about ₹10.7 crore. This is a simplified illustration: it assumes no debt or surplus cash, so equity value equals enterprise value. On a fully diluted 12,00,000 shares, that is a DCF value of roughly ₹90 per share. This is a FEMA and commercial pricing exercise, not an income-tax FMV. Suppose the lead investor agrees an issue price of ₹180 per share after negotiation. If the lead investor is a non-resident, FEMA requires the issue price to be not less than the fair value, and ₹180 per share is above the ₹90 floor. For a resident investor, the ₹90 premium over the DCF value is no longer an angel-tax issue. Either way, it is the number any future down-round anti-dilution clause will reference, so it belongs in the term sheet discussion, not just the tax file.
Worked example: FMV for an ESOP exercise
An employee holds vested options for 5,000 shares at an exercise price of ₹40 per share. The company's most recent merchant-banker valuation, dated four months before the exercise date (within the 180-day window), certifies FMV at ₹175 per share using a blended DCF/comparable-transaction approach. On exercise:
Perquisite value = (₹175 − ₹40) × 5,000 shares = ₹6,75,000, added to the employee's salary income for the year of allotment under section 17(1)(d) (old 17(2)(vi)) and subjected to TDS under section 392 (old 192) at slab rates (plus surcharge/cess as applicable). If the employee sells those shares later at ₹260 per share after a 30-month holding period, the capital gain is (₹260 − ₹175) × 5,000 = ₹4,25,000, taxed as long-term capital gains at 12.5% (no indexation) since the holding period from allotment exceeds 24 months. Note the FMV of ₹175 does double duty — it sets the taxable perquisite and the cost base for the later capital-gains computation.
If the company is a DPIIT-recognised eligible startup certified for the profit deduction under section 140 (old 80-IAC), the employee may additionally defer the TDS on the perquisite (not the tax itself) to the earliest of 48 months from the end of the assessment year of allotment, sale of the shares, or cessation of employment — a timing benefit only, computed at the slab rate of the year of allotment. See the full ESOP planning guide for pool sizing, vesting and cap-table mechanics.
FEMA pricing when a non-resident is involved
The moment a non-resident investor is on either side of an equity transaction, Rule 21 of the FEMA (Non-Debt Instruments) Rules, 2019 adds its own pricing requirement, independent of the Income-tax valuation.
| Transaction | Pricing rule | Who can certify |
|---|---|---|
| Issue of shares to a non-resident (FDI) | Price not less than FMV under an internationally accepted pricing methodology | CA, SEBI Cat-I Merchant Banker, or practising Cost Accountant |
| Transfer, resident to non-resident | Price not less than FMV | Same as above |
| Transfer, non-resident to resident | Price not more than FMV | Same as above |
| Share-swap (shares-for-shares) deals | Internationally accepted methodology, stricter certification | SEBI Merchant Banker or recognised foreign investment banker only |
| Listed company shares | SEBI (ICDR) pricing guidelines apply instead | Not a separate FEMA report |
For a transfer of unquoted shares between a resident and a non-resident, the FEMA price and the income-tax FMV under Rule 11UA(1)(c)(b) are computed on different bases and both have to be respected; confirm in the engagement letter which purposes a report covers rather than assuming one report serves both. FEMA compliance sits with the company's authorised dealer bank filing (FC-GPR/FC-TRS), and a mismatch between the tax valuation and the FEMA-reported price is a routine query point at the AD bank stage. Our detailed guide to Section 56(2)(x), Rule 11UA and FEMA pricing walks through the interaction with worked FMV examples. Foreign VCs and parent companies entering India can also see our FEMA share valuation service, which covers the FC-GPR reporting that follows.
Companies Act Section 247: when you need a Registered Valuer
Tax and FEMA valuations are necessary but not sufficient once a transaction touches specific Companies Act, 2013 provisions. Section 247 mandates that particular corporate actions be valued only by an IBBI Registered Valuer (Securities or Financial Assets category) — a distinct registration from ICAI membership or SEBI merchant-banker status, requiring separate examination and empanelment with the Insolvency and Bankruptcy Board of India.
- Section 62(1)(c): further issue of share capital on a preferential basis / private placement.
- Sections 230-232: any compromise, arrangement, merger or demerger scheme.
- Section 236: purchase of minority shareholding (squeeze-out) once an acquirer crosses 90% holding.
- Section 281: valuation for a company in liquidation.
The registered valuer must be appointed by the audit committee (or the board, if there is no audit committee), must give an impartial, true and fair valuation, and cannot value an asset in which they hold a direct or indirect interest. Contravention attracts a fine of ₹25,000 to ₹1 lakh; where the contravention involves fraud, the valuer faces imprisonment up to one year, a fine of ₹1 lakh to ₹5 lakh, refund of the fee received, and liability for resulting damages. A founder raising a preferential-allotment round therefore typically needs a FEMA or tax valuation where one applies and a separate IBBI Registered Valuer's report for the Section 62(1)(c) resolution — one does not substitute for the other, even where the two arrive at similar numbers. our fundraising valuation service scopes both where the round needs it.
Valuation-readiness checklist
- State the purpose upfront — income-tax FMV, ESOP FMV, FEMA pricing, or a Companies Act Section 247 event: the purpose decides who can sign, not the other way round.
- Confirm the valuer's registration is current — SEBI Category I status for a merchant banker (SEBI tightened net-worth and compliance norms for merchant bankers with effect from 3 January 2026), or the IBBI Registered Valuer's active registration for a Section 247 event.
- Latest financials — audited if available; if not yet audited at the valuation date, provisional financials with a clear note on that fact.
- Capitalisation table — fully diluted, including ESOP pool, CCPS/CCD conversion terms, and any pending conversions.
- Business plan / financial projections — needed for any DCF engagement; unsupported or stale projections are the single most common reason a DCF report gets challenged later.
- Comparable transaction or peer data — sector multiples or recent funding rounds, to cross-check the primary method.
- Board/audit-committee resolution appointing the valuer — mandatory where an IBBI Registered Valuer is being engaged under Section 247.
- FEMA-specific paperwork — if a non-resident is involved, line up the FIRMS/single master form filing timeline against the valuation date so FC-GPR/FC-TRS reporting isn't delayed waiting on the report.
- Prior valuation reports — share the last one or two reports with the new valuer so a sudden, unexplained swing in methodology or value is avoided or explained.
- Retention — keep the signed report, the underlying model/workings, and the engagement letter for at least the limitation period for reassessment under the Income-tax Act (3 years, or 5 years where escaped income is Rs 50 lakh or more) — not just until the deal closes.
Frequently asked questions
Is a valuation report still needed if angel tax has been abolished?
Yes. Angel tax under Section 56(2)(viib) was omitted for all investor classes from AY 2025-26, i.e. share issues in FY 2024-25 onward (Finance (No.2) Act 2024), and the Income-tax Act, 2025 has no equivalent. But valuation is still triggered independently by section 92(2)(m) (old 56(2)(x)) on the recipient of shares, section 79 (old 50CA) on the transferor, ESOP perquisite computation, Companies Act Section 247 for specified transactions, and FEMA pricing on any non-resident leg. A funding round, an ESOP exercise, a related-party share transfer or a buyback still needs a defensible valuation even though the angel-tax trigger itself is gone.
DCF or NAV — which method should our company use?
It depends on the law asking. For income-tax on share transfers and receipts (section 92(2)(m) / section 79, old 56(2)(x) / 50CA), the fair market value of unquoted equity shares is the adjusted NAV formula in Rule 11UA(1)(c)(b), and there is no merchant-banker DCF option. The Rule 11UA(2) choice between NAV and a merchant-banker DCF existed for the former angel-tax provision and has no live income-tax trigger for share issues after its omission. For FEMA pricing and commercial negotiation, DCF suits growth-stage and startup companies where value sits in future cash flows, while NAV suits asset-heavy, low-growth or holding companies.
Can our Chartered Accountant certify a DCF valuation for a funding round?
For FEMA pricing of a non-resident investment, yes: Rule 21 of the FEMA (Non-Debt Instruments) Rules, 2019 accepts a Chartered Accountant, a SEBI-registered Merchant Banker or a practising Cost Accountant using an internationally accepted pricing methodology such as DCF. The rule that reserved DCF for a SEBI Category I Merchant Banker was Rule 11UA(2)(b), which served the former angel-tax provision and no longer has a live income-tax trigger for share issues. Where the round is a preferential allotment under Companies Act Section 62(1)(c), an IBBI Registered Valuer's report is needed as well. Keep the roles distinct in the engagement letter so the certificate isn't challenged on locus.
Do we need an IBBI Registered Valuer or is a Chartered Accountant/merchant banker enough?
It depends on which law is asking. Income-tax valuation and FEMA pricing accept a CA, a SEBI Category I Merchant Banker, or (for FEMA) a practising Cost Accountant, depending on the method. Companies Act, 2013 Section 247 is stricter: specified transactions — preferential allotment under Section 62(1)(c), a compromise/arrangement or merger under Sections 230-232, a minority squeeze-out under Section 236, and liquidation under Section 281 — must be valued by an IBBI Registered Valuer (Securities or Financial Assets category), a separate registration from ICAI membership or SEBI merchant-banker status. Many transactions need both a tax or FEMA valuation and a registered valuer's report side by side.
How is the fair market value of ESOP shares determined for tax purposes?
For an unlisted company, FMV on the date of exercise must be certified by a SEBI-registered Category I Merchant Banker — not a Chartered Accountant. That report stays valid for 180 days from its date; if no valid report exists within 180 days of an exercise event, a fresh valuation is required. The taxable perquisite is FMV on the exercise date minus the exercise price actually paid by the employee, taxed as salary income under section 17(1)(d) of the Income-tax Act, 2025 (old 17(2)(vi)) with TDS under section 392 (old 192); on a later sale, the cost of acquisition for capital gains is that same exercise-date FMV, with no indexation available.
How is valuation different when a foreign investor is involved?
Any issue or transfer of equity instruments involving a non-resident is priced under Rule 21 of the FEMA (Non-Debt Instruments) Rules, 2019, on an "internationally accepted pricing methodology" — commonly DCF, NAV, earnings capitalisation, comparable transactions, or market price for listed shares — certified by a Chartered Accountant, a SEBI Category I Merchant Banker, or a practising Cost Accountant. Share-swap valuations (shares-for-shares deals) are stricter and need a Merchant Banker or a recognised foreign investment banker. The FEMA price and the income-tax FMV for the same transaction do not have to be identical, but a large, unexplained gap between them is a common notice trigger and should be reconciled in the valuation report itself.
What happens if the actual issue price is higher than the Rule 11UA fair market value?
For a closely held company issuing shares to a resident investor above the Rule 11UA fair market value, the excess is no longer taxable as angel tax income in the company's hands from AY 2025-26 onward (share issues in FY 2024-25 and later), since Section 56(2)(viib) has been omitted. It can still matter for other purposes: the difference affects the investor's cost of acquisition analysis under section 92(2)(m) (old 56(2)(x)) if shares are later received by another party below FMV, and any FEMA pricing floor for a non-resident investor still has to be respected independently. Document the commercial rationale for a premium over the tax valuation regardless — investors, auditors and future acquirers will ask for it.
Can one valuation report be used for Income-tax, Companies Act and FEMA purposes together?
Sometimes, but don't assume it by default. A DCF report prepared for FEMA pricing can inform commercial negotiation, but for income-tax on share transfers the FMV of unquoted equity is the adjusted NAV formula in Rule 11UA(1)(c)(b), so a separate computation is usually needed. A FEMA or tax valuation cannot substitute for an IBBI Registered Valuer's report where Companies Act Section 247 makes that valuer mandatory (preferential allotment, mergers, minority buyout, liquidation) — that needs a separate RV engagement even if the numbers land close together. Always state the specific purpose and the specific rule/section in the valuation engagement letter so the report's scope is unambiguous if it is examined later.
How far back can the valuation date be from the actual transaction date?
For ESOP exercise FMV, the merchant banker's certificate stays usable for 180 days from its own date. The 90-day window in Rule 11UA(3) applied to merchant-banker DCF reports under the former angel-tax provision and is now mainly relevant to open assessments of earlier years. For other purposes, get a valuation dated close to the transaction rather than stretching an old report to cover a materially different date or a materially changed business.
We scope the right method against the right rule before we start — not after a notice asks why the numbers don't reconcile.
Rule 11UA / Fundraising Valuation ESOP Valuation FEMA Share Valuation Talk to usThis article explains the general valuation framework under the Income-tax Act, 2025 and the Income-tax Rules, the Companies Act, 2013 and FEMA as applicable for FY 2026-27 and is for general information only; it does not constitute a valuation opinion or professional advice for any specific transaction. Rule references, thresholds and the SEBI merchant-banker registration changes are stated as understood on the review date above and should be independently confirmed against the transaction date before filing or closing. Please consult us with your company's specific facts before relying on any figure here for a live transaction.