Last reviewed: 21 August 2026. Angel tax is dead — Section 56(2)(viib) stopped applying to any investor class from AY 2026-27 (Finance (No.2) Act 2024, effective 1 April 2025) — 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.
- 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 — no longer applies to shares issued on or after 1 April 2025 (AY 2026-27), 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 |
|---|---|---|
| Sec 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) FMV vs consideration paid |
| Sec 50CA — transfer of unquoted shares below FMV | The transferor, as deemed full value of consideration for capital gains | Rule 11UA(1) FMV, deemed sale price |
| ESOP exercise — Sec 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 | SEBI Cat-I Merchant Banker (for Rule 11UA tax purposes) |
| 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(2)(A) sets out the two principal methods for the fair market value of unquoted equity shares:
- NAV method — Rule 11UA(2)(A)(a): FMV per share = (book value of assets, adjusted for jewellery/art/quoted securities/immovable property at fair/stamp-duty value, minus book value of liabilities) × paid-up value of the share ÷ total paid-up equity capital. A practising Chartered Accountant can certify this.
- DCF method — Rule 11UA(2)(A)(b): FMV per share = present value of projected free cash flows plus terminal value, divided by the number of shares, discounted at an appropriate rate. This one is reserved for a SEBI-registered Category I Merchant Banker — a CA-signed DCF report does not satisfy this clause, however sound the underlying financial model is.
Rule 11UA(3) gives useful flexibility on timing: where the merchant banker's DCF report is dated not more than ninety days before the date of issue of shares, the assessee may treat that report's date as the valuation date. That means a round that closes six weeks after the valuation report was signed is still covered — a round that closes seven months later is not, and needs a fresh certificate.
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 going forward, 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 or FY 2024-25, so don't assume they're irrelevant to a company with an open assessment from those years.
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 a terminal value of ₹28 crore at the end of year five (perpetuity growth of 5% beyond that). 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 ₹3.9 crore, and the discounted terminal value adds a further ₹10.4 crore — a total enterprise value near ₹14.3 crore. On a fully diluted 12,00,000 shares, that is a Rule 11UA fair market value of roughly ₹119 per share. If the lead investor is negotiating at ₹180 per share, the ₹61 premium over the merchant banker's FMV is not a tax problem post-abolition of angel tax for a resident investor — but it is precisely the number a FEMA pricing check and 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 and subjected to TDS under Section 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, Section 80-IAC-certified eligible startup, 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 |
A DCF report obtained from a Category I Merchant Banker for Rule 11UA can often double up to satisfy the FEMA methodology requirement, since both accept broadly the same income-approach methods — but confirm that explicitly in the engagement letter rather than assuming it; FEMA compliance sits with the company's authorised dealer bank filing (FC-GPR/FC-TRS), and a mismatch between the Rule 11UA price 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.
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 both a Rule 11UA merchant-banker or CA certificate for tax purposes 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 — Rule 11UA tax valuation, 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 (currently up to 4-10 years depending on the escaped-income threshold) — 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) stood abolished for all investor classes from AY 2026-27 (FY 2025-26 onwards, Finance (No.2) Act 2024), but Rule 11UA valuation is still triggered independently by Section 56(2)(x) on the recipient of shares, Section 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 under Rule 11UA?
NAV suits asset-heavy, low-growth or holding companies where book value tracks economic value reasonably well; it can be certified by a practising Chartered Accountant. DCF suits growth-stage and startup companies where value sits in future cash flows rather than the current balance sheet, but Rule 11UA(2)(A)(b) requires the Discounted Free Cash Flow valuation to be done by a SEBI-registered Category I Merchant Banker — a CA cannot sign a Rule 11UA DCF report for this purpose, even though CAs routinely build the underlying financial model.
Can our Chartered Accountant certify a DCF valuation for a funding round?
For Rule 11UA(2)(A)(b) purposes specifically (fair market value of unquoted equity shares for tax provisions that key off that formula), no — the DCF method under that clause is reserved for a SEBI-registered Category I Merchant Banker. A CA can, and often does, certify the NAV method, prepare the underlying projections and financial model that feed a merchant banker's DCF report, and independently opine on valuation for non-tax purposes such as internal negotiation support or a management estimate. Keep the two 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 Rule 11UA 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 Rule 11UA certificate 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(2)(vi) with TDS under Section 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 Rule 11UA price for the same transaction do not have to be identical instruments of law, 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 2026-27 onward, since Section 56(2)(viib) has been withdrawn. It can still matter for other purposes: the difference affects the investor's cost of acquisition analysis under Section 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 merchant banker's DCF report prepared for Rule 11UA can often support the FEMA pricing requirement too, since both accept a Cat-I Merchant Banker and similar methodologies. It 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?
Under Rule 11UA(3), where a merchant banker's Discounted Free Cash Flow valuation report is dated not more than ninety days before the date of issue of shares, the assessee may treat that report's date as the valuation date — so a DCF report doesn't have to be dated the exact day of allotment. For ESOP exercise FMV, the merchant banker's certificate stays usable for 180 days from its own date. Outside these specific windows, get a fresh valuation 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 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.