Fund · Startups
How are shares valued for a funding round, and who can certify the valuation?
The valuation methods available under Rule 11UA, and who is authorised to certify a startup's share valuation.
When a closely held company issues shares, the price is generally tested against a fair market value worked out under Rule 11UA of the Income-tax Rules, 1962. Two methods are commonly used, the net asset value method and the discounted cash flow method. A registered valuer, a merchant banker or a chartered accountant certifies the valuation, depending on the method used. Withdrawal of angel tax under section 56(2)(viib) has changed why this valuation matters for some transactions.
The statutory positions on this page were reviewed by Lalit Mohan Tyagi, FCA on 26 August 2026. They describe the general position and not every provision that may apply to a particular case. Confirm your own position with the firm before you act on it.
Why does a company need a formal valuation to raise a funding round?
A formal valuation sets a defensible fair market value for the shares being issued, which both the company and the investor rely on.
It also supports the share price used in the share subscription and shareholders' agreements signed for the round.
For a closely held company, the valuation additionally has a role under income tax law, described in the sections below.
What is Rule 11UA, and what methods does it set out?
Rule 11UA of the Income-tax Rules, 1962 prescribes how the fair market value of unquoted equity shares is determined for various purposes under the Income-tax Act.
For unquoted equity shares, the rule generally allows a choice between the net asset value method and the discounted cash flow method.
The rule sets out the formula and inputs for each method in detail.
What is the net asset value method?
The net asset value method values a share based on the company's assets minus its liabilities, divided by the number of equity shares.
It uses figures from the company's audited or provisional balance sheet as at the relevant valuation date.
It tends to produce a lower value than the discounted cash flow method for an early-stage company with limited assets but strong growth prospects.
What is the discounted cash flow method?
The discounted cash flow method values a share based on projected future cash flows, discounted back to a present value.
It is generally the method a growth-stage startup uses, since it can reflect expected future revenue rather than only current assets.
The projections and assumptions behind the discounted cash flow are set out in the valuation report itself.
Who is authorised to certify the valuation?
A discounted cash flow valuation is generally certified by a merchant banker.
A net asset value valuation can generally be certified by a chartered accountant.
Certain other purposes, including some FEMA-related filings, separately require a registered valuer under the Companies Act framework.
Does the withdrawal of angel tax under section 56(2)(viib) change the need for a Rule 11UA valuation?
Section 56(2)(viib) taxed the excess of a share issue price over fair market value in certain closely held companies, and was withdrawn by the Finance (No. 2) Act, 2024.
Its withdrawal reduces one reason a Rule 11UA valuation mattered, but the rule continues to apply for other purposes under the Income-tax Act.
A valuation is still generally needed to support the share price agreed with investors and for compliance under other provisions described on this page.
Does valuation for FEMA reporting differ from valuation for income tax purposes?
Foreign exchange law uses its own fair value concept for a share issue to a person resident outside India, generally based on an internationally accepted valuation methodology.
This can differ in method and outcome from the Rule 11UA valuation prepared for income tax purposes.
A round that includes both resident and non-resident investors can therefore need two valuation reports, prepared under two different frameworks.
What happens if shares are issued below the assessed fair market value?
Where shares are issued to a resident investor below the fair market value assessed under the applicable rule, the shortfall can be treated as income in the hands of the recipient investor.
The provision governing this is separate from the angel tax provision that applied to the issuing company and has been withdrawn.
The position for a particular transaction should be confirmed with the firm before shares are allotted.
Statutory basis
| Position | Rests on | Stated as at | Status |
|---|---|---|---|
| Rule 11UA of the Income-tax Rules, 1962 prescribes the net asset value method and the discounted cash flow method for valuing unquoted equity shares. | Income-tax Rules, 1962, rule 11UA | August 2026 | Verified |
| A discounted cash flow valuation under rule 11UA is generally certified by a merchant banker, and a net asset value valuation can generally be certified by a chartered accountant. | Income-tax Rules, 1962, rule 11UA and rule 11U | August 2026 | Verified |
| Section 56(2)(viib), commonly called angel tax, was withdrawn by the Finance (No. 2) Act, 2024. | Finance (No. 2) Act, 2024 | August 2026 | Verified |
| A share issue to a person resident outside India is separately valued under FEMA using an internationally accepted valuation methodology, which can differ from the Rule 11UA valuation used for income tax purposes. | FEMA (Non-Debt Instruments) Rules, 2019, and the Income-tax Rules, 1962 | August 2026 | Verified |
| Shares issued to a resident investor below the fair market value assessed under the applicable valuation rule can result in the shortfall being treated as income of the recipient investor. | Income-tax Act, 1961, section 56(2)(x) | August 2026 | Verified |
Is a Rule 11UA valuation required for every share issue?
It is generally required whenever a closely held company issues shares, though the exact requirement depends on the provision and transaction involved.
Can a startup use both NAV and DCF and pick the higher value?
The choice of method depends on which provision of the Income-tax Act the valuation is being prepared for, rather than a free choice between the two figures.
Does DPIIT recognition remove the need for a valuation altogether?
No. DPIIT recognition connects to other benefits, but a company issuing shares still generally needs a valuation to support the price of the round.
Who signs the valuation report, a chartered accountant or a merchant banker?
It depends on the method and the purpose. A merchant banker generally certifies a discounted cash flow valuation, and other purposes have their own requirements.
Does a valuation prepared for a funding round expire?
A valuation is prepared as at a specific date, so a materially later transaction generally needs a fresh valuation rather than relying on an old report.
Related pages in this section
Last reviewed 26 August 2026.