From Rule 11UB to Rule 11: Indirect-Transfer Valuation under the Income-tax Act, 2025

With effect from 1 April 2026, the Income-tax Act, 2025 and the Income-tax Rules, 2026 replace the Income-tax Act, 1961 and the Income-tax Rules, 1962. As part of this overhaul, the statute has been renumbered. Two rules that valuation and tax professionals have long relied on – Rule 11UB and Rule 11UC – governed how India values a foreign company that derives its worth, in substance, from Indian assets, and how much of an offshore gain India may tax. Both now appear under new rule numbers, with their substance largely intact.

If you are a CFO or founder sitting under a foreign holding structure, or contemplating a private-equity exit, this note walks through what changed in the numbering, what an indirect transfer is and why the provision exists, and – at its core – exactly how the fair market value that decides your tax exposure is computed.

1. The change: what 11UB and 11UC became

The shift is one of numbering, not abolition. The deeming provision that pulls an offshore share sale into the Indian tax net, earlier found in Section 9(1)(i) of the 1961 Act (read with its Explanations), now sits in Section 9(10) of the 2025 Act. The two valuation rules that operate under it have been correspondingly renumbered in the 2026 Rules, carrying forward substantially the same tests and methods.

Concept	Old law (up to 31 Mar 2026)	New law (from 1 Apr 2026)
Charging / deeming provision	Section 9(1)(i), Explanations 5–7	Section 9(10)
FMV of assets	Rule 11UB	Rule 11
Income attributable to India	Rule 11UC	Rule 12
Definitions for the FMV rules	Rule 11U	Rule 10
Accountant’s apportionment report	Form No. 3CT	Form No. 4

One point of timing matters more than any other for a live file. The new framework applies from Tax Year 2026-27 onwards. Income earned in FY 2025-26, and any proceeding already pending on 1 April 2026, continues to be governed by the 1961 Act and the 1962 Rules as though they had not been repealed. So the right citation depends on when your transfer occurred – and for deals straddling the changeover, that is the first question to settle.

2.  What an “indirect transfer” is, and why the provision exists

Ordinarily, when one non-resident sells shares of a foreign company to another non-resident, nothing about that sale is Indian – not the buyer, the seller, the shares, or the place of signing. India would have no claim. The indirect-transfer provision is a deliberate deeming fiction that overrides this: where the foreign company’s value comes substantially from assets located in India, the law treats its shares as if they were situated in India, and the gain on their sale as if it accrued here.

In practice, indirect transfers arise through layered corporate structures. A foreign holding company owns an Indian company (directly, or through one or more intermediate foreign companies), so that the holding company’s value comes largely from the Indian business underneath it. When the shares of that foreign holding company are sold, the buyer is really acquiring the Indian business – but the sale happens offshore, in the shares of the foreign company, not in the Indian shares themselves. The indirect-transfer provision looks through the structure and treats the gain, to the extent it relates to India, as taxable here.

The provision traces back to the Vodafone litigation, where an entirely offshore transfer of a foreign company holding an Indian telecom business was held to fall outside India’s tax net in the absence of an express look-through rule. The law was amended to provide that look-through, and the 2025 Act carries it forward.

The two-part test in Section 9(10)

A foreign company’s shares are deemed to derive their value substantially from Indian assets only if, on the specified date, both of the following are true:

• the fair market value of the Indian assets exceeds ₹10 crore  [Section 9(10)(b)(i)]; and
• those Indian assets represent at least 50% of the value of all assets owned by the foreign company  [Section 9(10)(b)(ii)].

Both limbs must be satisfied at once. Fail either – the Indian slice is large in percentage but under ₹10 crore, or valuable in rupees but below half the group – and the provision does not bite. Crucially, the value here is FMV without reduction of liabilities [Section 9(10)(c)].

The “specified date”

Both limbs of the test are checked on a single reference date, called the specified date. Section 9(10)(d) fixes it in one of two ways:

• the default specified date is the last day of the accounting period that ends before the date of transfer (in most cases, the previous 31 March); but
• if the book value of the company’s assets on the actual transfer date is higher than the book value on that earlier date by 15% or more, then the specified date becomes the transfer date itself.

The second limb exists so that a sudden build-up of assets just before a sale – a large funding round, a revaluation, or a big receivable – cannot be used to sidestep the test by relying on an out-of-date balance sheet.

Worked example – fixing the specified date, then applying the two-part test ForeignCo, incorporated abroad, follows a 31 March accounting year. Its shares are sold on 1 December 2026.

Step 1 – which specified date? The accounting period ending before the transfer closes on 31 March 2026, when the book value of ForeignCo’s assets was ₹500 crore. On the transfer date (1 December 2026), the book value has risen to ₹600 crore. The increase is ₹100 crore, i.e. 20% over ₹500 crore – which is 15% or more. Because the 15% threshold is crossed, the specified date shifts from 31 March 2026 to the transfer date, 1 December 2026. Had the rise been, say, only 8%, the specified date would have stayed at 31 March 2026. All values below are therefore taken as on 1 December 2026.

Step 2 – apply the two-part test on that date On 1 December 2026, ForeignCo’s total assets (valued at FMV, without deducting liabilities) are ₹600 crore. Of these, the Indian assets – its shareholding in an Indian operating company – are valued at ₹390 crore. Limb 1 (the ₹10 crore test): the Indian assets are ₹390 crore, which comfortably exceeds ₹10 crore. Satisfied. Limb 2 (the 50% test): the Indian assets as a share of the whole = 390 ÷ 600 = 65%, which is at least 50%. Satisfied. Both limbs are met on the specified date, so ForeignCo’s shares are treated as deriving their value substantially from Indian assets, and the indirect-transfer provision applies. Had the Indian assets been ₹390 crore but total assets ₹900 crore (a 43% share), Limb 1 would pass but Limb 2 would fail – and the provision would not apply, because both must be satisfied together.

Who is carved out

Two exemptions in Section 9(10)(g) narrow the net:

• Small-shareholder exemption – a transferor who, together with associated enterprises, at no time in the twelve months before transfer held the right of management or control, or more than 5% of voting power, share capital or interest, is outside the charge.
• Foreign portfolio investors – investment held through specified categories of SEBI-registered FPIs is excluded.

Example – the cross-border M&A / PE exitExample – the cross-border M&A / PE exit

The parties: SingCo (a Singapore company) is the seller; it owns 100% of MauCo (a Mauritius holding company); MauCo in turn owns 100% of IndCo (an Indian operating company). GermanCo (a German company) is the buyer. MauCo has no assets other than its shareholding in IndCo.

The transaction: GermanCo buys 100% of MauCo from SingCo for the equivalent of ₹297 crore. IndCo (the Indian business) is valued at ₹250 crore; MauCo has no other assets.

The result: the Indian assets make up 100% of MauCo’s value and far exceed ₹10 crore, so both limbs of the test are met. SingCo holds far more than 5% and controls MauCo, so the small-shareholder carve-out does not help. Although the sale is entirely offshore – SingCo to GermanCo, in the shares of a Mauritius company – the gain, to the extent attributable to India, is taxable here, and GermanCo as buyer carries a withholding exposure. This is the classic case the provision was written for.

3.  Why valuation sits at the centre of this rule

Notice that every operative question in Section 9(10) is answered by a valuation. Does the Indian asset exceed ₹10 crore? Does it clear 50% of the whole? And, once the charge applies, how much of the gain is attributable to India? Each of these is a fair-market-value determination – the statute itself says the value “shall be … determined in the manner as may be prescribed.”

In other words, FMV is not a downstream computation that follows liability – it is the hinge on which liability turns. Get the valuation wrong and you can misjudge whether the provision applies at all, or over- or under-report the taxable slice. This is why the prescribed methodology in Rule 11 deserves close reading rather than a glance.

4.  How fair market value is computed under Rule 11

This is the core of the framework. Rule 11 does two distinct jobs. First, it values the Indian asset (the numerator of the later attribution formula) – and the method depends on what that asset is. Second, it values all the assets of the foreign entity (the denominator). We take each in turn, then the four scenarios for the whole-entity value.

4.1  Listed Indian shares – Rule 11(2)

Where the Indian asset is a share listed on a recognised stock exchange, FMV is the observable price. Rule 10 defines this precisely: the higher of (a) the average of the weekly high and low of closing prices over the six months before the specified date, and (b) the same average over the two weeks before it. Using a defined averaging window rather than a single day’s close guards against a cherry-picked date.

There is an important exception where the shareholding carries a right of management or control – and that right can exist indirectly, through the structure, not just by holding the shares directly. Consider: Mr. X owns 100% of Holding Company A; Holding Company A owns 60% of Listed Company B. Mr. X holds no shares in Company B directly, yet through Holding Company A he controls it. When Company B’s shares are transferred as part of this controlling structure, the rule treats that management or control as existing indirectly.

Where such a right of management or control exists, the market price alone is treated as inadequate to capture the value of a controlling stake, and a formula applies:

FMV per share  =  (A + B) ÷ C

• A = market capitalisation, based on the observable price of the shares;
• B = the book value of the company’s liabilities;
• C = the total number of outstanding shares.

Where the share is listed on more than one exchange, the price is taken from the exchange with the highest trading volume in that share.

Worked example – control block in a listed company
A foreign entity holds a controlling stake in a listed Indian company. The observable price yields a market capitalisation of ₹800 crore; the company’s book liabilities are ₹200 crore; there are 10 crore shares outstanding. Because the holding confers control, FMV per share = (800 + 200) ÷ 10 = ₹100, not the ₹80 that market capitalisation alone (800 ÷ 10) would suggest. Adding liabilities lifts the per-share value – reflecting that a controlling owner effectively stands behind the whole enterprise, debt included.

4.2 Unlisted Indian shares – Rule 11(3)

For an unlisted Indian company – the usual case in a start-up or private-equity structure – there is no market price to observe. FMV is therefore the value determined by an accountant (a Chartered Accountant) or a merchant banker, using any internationally accepted valuation methodology on an arm’s-length basis (in practice, DCF, comparable-company, or net-asset approaches), increased by the liabilities, if any, taken into account in that determination.

Worked example – unlisted operating company
A Chartered Accountant values an unlisted Indian subsidiary at ₹250 crore on a DCF basis, after treating ₹40 crore of borrowings as a liability in the model. The FMV taken for Section 9(10) is ₹250 crore + ₹40 crore = ₹290 crore. The grossing-up ensures the figure reflects enterprise value on a debt-inclusive basis, consistent with the “without reduction of liabilities” principle in the charging section.

4.3  Interest in a partnership firm or AOP – Rule 11(4)

Where the Indian asset is an interest in a firm or association of persons, valuation is a two-step exercise. First, an accountant (Chartered Accountant) or a merchant banker values the whole firm or AOP (again grossed up for liabilities). Then that value is allocated among the partners or members, as follows:

• the portion equal to the firm’s capital is split in the ratio of capital actually contributed;
• the residue is split as the partnership or AOP agreement provides for distribution on dissolution;
• if the agreement is silent, the residue follows the profit-sharing ratio.

The sum allocated to a given partner or member is the FMV of that interest.

4.4  Any other asset – Rule 11(5)

For assets that are neither listed shares, unlisted shares, nor partnership/AOP interests, FMV is the open-market price the asset would fetch on sale, as determined by an accountant (Chartered Accountant) or a merchant banker, increased by any liabilities taken into account. This is the residual catch-all that keeps the framework comprehensive.

4.5  Value of ALL the assets of the foreign entity – Rule 11(6)

The attribution formula in Section 6 needs a denominator: the FMV of everything the foreign company owns, in India and outside. Rule 11(6) prescribes four scenarios, and in each the answer is A + B, where B is the book value of the entity’s liabilities:

Scenario	A (the value component)	B
1. Transfer between persons who are NOT connected	Market capitalisation based on the actual full value of consideration for the transfer	Book value of liabilities (certified by an accountant / merchant banker)
2. Foreign share listed on a stock exchange	Market capitalisation based on the observable price on that exchange	Book value of liabilities
3. Foreign share listed on more than one exchange	Market capitalisation based on the price on the exchange with the highest trading volume	Book value of liabilities
4. Foreign share NOT listed	FMV of the entity determined by an accountant / merchant banker on an internationally accepted methodology	Liabilities considered in determining A

4.6  Which balance sheet is used – the audited-accounts requirement

A point that matters greatly in practice: the FMV computation is anchored to audited financials. For an Indian company, the value is determined from its balance sheet as drawn up on the specified date and audited by the company’s auditor. For a foreign company or entity, the relevant balance sheet is the one drawn up on the specified date and submitted to the authority of the country where it is registered or incorporated. The valuation is only as reliable as the audited numbers behind it.

What if audited accounts on the specified date are not ready? The rule anticipates this. Where the balance sheet as on the specified date has not been drawn up because accounts are still being finalised, an interim balance sheet drawn up as on the specified date may be used. But that is provisional: once the final financial statements are available, the FMV must be re-computed and appropriately modified in line with the audited figures, and the apportionment adjusted accordingly [Rule 11(7)]. In our experience, the safer course is to obtain audited financials wherever possible, and, where an interim balance sheet is unavoidable, to record a clear management representation that no material change is expected between the interim and final figures.

Two further mechanical points complete the rule. In valuing an Indian company or firm, all its assets and business operations are taken into account, whether located in India or abroad [Rule 11(8)]. And any values expressed in foreign currency are converted at the telegraphic-transfer buying rate on the specified date [Rule 11(9)].

5.  Who may do the valuation – accountant or merchant banker

Rule 11 allows the valuation to be carried out by an accountant – that is, a Chartered Accountant – or by a merchant banker. Which asset calls for which is set out below; in every case where a valuer is required, a Chartered Accountant is a permitted option, and the accountant’s report that accompanies the return (Section 6) can be given only by a Chartered Accountant.

Asset being valued	Who may value	Basis
Listed Indian shares	No valuer needed – observable price / formula	Rule 11(2)
Unlisted Indian shares	Accountant (CA) or merchant banker	Rule 11(3)
Partnership / AOP interest	Accountant (CA) or merchant banker	Rule 11(4)
Any other asset	Accountant (CA) or merchant banker	Rule 11(5)
All assets of the foreign entity (unlisted)	Accountant (CA) or merchant banker	Rule 11(6)
Apportionment report filed with the return	Accountant (CA) only	Rule 12(3), Form No. 4

Who is an “accountant”?

Section 2(1) of the 2025 Act defines “accountant” by pointing to Section 515(3)(b), which means a Chartered Accountant as defined in the Chartered Accountants Act, 1949 who holds a valid certificate of practice – subject to the usual exclusions (for a company, someone ineligible to be its auditor; the assessee, its partners or members, and their relatives, and so on). Notably, despite representations during the Bill stage, the definition was not widened to include Company Secretaries or Cost Accountants; for this purpose, “accountant” remains a practising CA.

Who is a “merchant banker”?

A Category I merchant banker registered with SEBI – offered by the rule as an alternative valuer for the asset valuations above. The apportionment report filed with the return, however, must be signed by a Chartered Accountant, as Section 6 explains.

6.  Apportioning the gain to India – Rule 12

Once the charge applies, India does not tax the whole offshore gain – only the part reasonably attributable to Indian assets, as Section 9(10)(f) requires. Rule 12 supplies the formula:

Income attributable to India  =  A × (B ÷ C)

• A = the income from the transfer, computed as if the share or interest were located in India;
• B = FMV of the Indian assets on the specified date (Rule 11);
• C = FMV of all the assets of the foreign entity on the specified date (Rule 11).

Worked example – putting Rule 11 and Rule 12 together
A non-resident sells shares of a foreign company and makes a total gain of ₹400 crore on the sale. That whole gain is our A. Under Rule 11, the foreign company’s Indian assets are valued at ₹290 crore (B), and all of its assets worldwide at ₹580 crore (C).

The idea behind the formula is simple: India should tax only the slice of the gain that corresponds to the Indian portion of the business. So we first work out what fraction of the whole company is Indian – that is B ÷ C = 290 ÷ 580 = 0.5, or 50%. In other words, half of everything the foreign company owns sits in India.

We then apply that same 50% to the gain: ₹400 crore × 50% = ₹200 crore. That ₹200 crore is the part taxable in India; the other half relates to non-Indian assets and is outside India’s net. The Indian share of the gain is driven entirely by the two Rule 11 valuations (B and C) – which is why getting those valuations right is what decides the tax.

Two compliance points complete the picture. The transferor must file, along with the return, a report in Form No. 4, signed and verified by a Chartered Accountant, setting out the basis of apportionment and certifying that the income attributable to India has been correctly computed [Rule 12(3)]. And if the transferor fails to supply the information needed to apply the formula, the Assessing Officer may determine the income in such manner as he deems suitable [Rule 12(2)] – rarely a taxpayer-friendly outcome. Cooperation, and a defensible valuation, are the better path.

7.  What this means for you

The renumbering from 11UB/11UC to Rule 11/Rule 12 is a good moment to re-examine how an offshore transaction in your group would be treated under the indirect-transfer provisions. A few practical takeaways:

• Map your structure early. If Indian assets could clear the ₹10 crore and 50% thresholds on the specified date, assume the provision is in play and plan the valuation before, not after, signing.
• Anchor the valuation to audited financials. The FMV rests on the audited balance sheet as on the specified date; where only interim accounts exist, expect to re-compute once finals are ready.
• Line up the right professional. Unlisted Indian shares and whole-entity values can be valued by a Chartered Accountant (or a merchant banker) on an internationally accepted methodology; the Form No. 4 apportionment report must come from a Chartered Accountant.
• Remember the buyer’s exposure. Withholding obligations can attach to the acquirer of a foreign company with Indian value – diligence and valuation protect both sides.

A robust, well-documented valuation is the single most effective protection in an indirect-transfer assessment – it fixes whether the provision applies at all and how much of the gain India can reach. As a Chartered Accountancy and valuation firm, we can help you scope the thresholds, prepare a defensible Rule 11 valuation on audited financials, and provide the Form No. 4 apportionment report filed with the return.

8. Conclusion

The move from Rule 11UB and Rule 11UC to Rule 11 and Rule 12 changes the citations, not the substance. The two-part test survives, the ₹10 crore and 50% thresholds survive, the specified date and its 15% trigger survive, and the apportionment formula survives. What the renumbering does change is every reference in your existing memos, engagement letters and diligence checklists – and the first question on any live file is now which framework applies, since transfers in FY 2025-26 and proceedings pending on 1 April 2026 remain under the old law.

Beneath the renumbering, the point worth holding on to is that this is a valuation provision wearing a tax provision’s clothing. Whether India can tax an offshore deal at all, and how much of the gain it can reach, are both answered by fair market value on a single date. A valuation prepared after the deal signs is a defensive document. One prepared before it – anchored to audited financials, on an internationally accepted methodology, by a valuer the rule actually permits – is a commercial input that shapes structuring, pricing and the buyer’s withholding position.

For groups sitting under a foreign holding structure, the sensible moment to test the thresholds is now, while the answer can still influence the transaction rather than merely explain it.

Frequently Asked Questions

1. When does the new Rule 11 apply?

From 1 April 2026, for Tax Year 2026-27 onwards. If your transfer happened in FY 2025-26, the old Rule 11UB and Rule 11UC still apply.

2. When does an offshore sale become taxable in India?

Only when both tests are met on the specified date: the Indian assets are worth more than ₹10 crore, and they make up at least 50% of the foreign company’s total assets. Fail either test and the provision does not apply.

3. What is the “specified date”?

Normally the last day of the accounting year ending before the sale – usually 31 March. But if the company’s book value of assets on the sale date is 15% or more higher than on that earlier date, the sale date becomes the specified date instead.

4. Who can do the valuation?

A practising Chartered Accountant or a SEBI-registered Category I merchant banker. Company Secretaries and Cost Accountants are not permitted. The Form No. 4 report filed with the return must be signed by a Chartered Accountant.

5. What if audited accounts are not ready?

You can use an interim balance sheet as on the specified date. Once the audited accounts are finalised, the valuation must be re-done and the apportionment corrected.

6. Is the whole gain taxed in India?

No. Only the Indian share of the gain is taxed, worked out as gain × (Indian assets ÷ total assets). If Indian assets are half the company, half the gain is taxable here.

This article is for general information only and reflects the Income-tax Act, 2025 and the Income-tax Rules, 2026 as notified (G.S.R. 198(E), 20 March 2026), effective 1 April 2026. It is not legal or tax advice, and statutory provisions may be amended or clarified. Any transaction should be evaluated on its specific facts with professional advice.