New Rules for Valuation of Investments in Startups

• 26 Sep 2023

The Income Tax department has recently announced rules governing the valuation of equity and compulsorily convertible preference shares (CCPS) issued by startups to both resident and non-resident investors.

Key Points

• Amendments to Rule 11UA of I-T Rules: Rule 11UA of the Indian Income Tax Act has been amended, coming into effect on September 25.
• Under these changes, the Central Board of Direct Taxes (CBDT) allows the valuation of CCPS to be based on the fair market value of unquoted equity shares.
• Retention of Valuation Methods: The amended rules retain five valuation methods proposed in the draft rules for consideration received from non-resident investors, including Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method, and Replacement Cost Method.
• Positive Changes and Flexibility: The changes simplify the valuation date consideration, incentivize venture capital investments, facilitate investments from notified entities, and provide clarity on CCPS.
• Tolerance thresholds for minor valuation discrepancies enhance efficiency and fairness in tax assessments.