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New valuation rules under the Angel Tax regime

17 Oct 2023

Trilegal X AVCJ and MergerMarket – ION Group
Following a public consultation, new valuation rules for the issue of equity and preference shares to residents and non-residents have been finalised and made applicable from 25 September 2023. This update analyses the key provisions of these rules and highlights a few legal lacunae that remain unaddressed.
Partner: Himanshu Sinha, Counsels: Aditi Goyal and Rohit Kumar S


The Central Board of Direct Taxes (CBDT), had earlier issued a draft notification on 26 May 2023 seeking public comments on new valuation methods proposed to be prescribed for the issue of equity shares to residents and non-residents. (To read our detailed update on the draft notification, click here.)

After receiving public comments, the CBDT has now issued the Income Tax (Twenty-First Amendment) Rules, 2023 (Rules), finalising the new valuation rules, applicable from 25 September 2023, for the issue of equity shares as well as preference shares to residents and non-residents. These Rules amend Rule 11 UA of the Income Tax Rules, 1962.

The excess of the consideration received by a private limited company (PLC) for the issue of shares to residents and non-residents, over the fair market value (Tax FMV) of the shares as prescribed in these Rules, is deemed to be the income of the PLC as per the provisions of the Income Tax Act, 1961 (ITA). Such income is taxed at the corporate tax rate applicable to the PLC (Angel Tax). On the positive side, the Rules offer multiple valuation methods to determine the Tax FMV, however, the Rules do not address many issues especially those related to convertible instruments, as discussed below.

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