Valuation of Unquoted Shares under Income-tax Act, 2025: Analysis of Sections 26(2)(j), 72, 92 and Rule 57

Statutory Framework for Valuation under Income-tax Act, 2025

The Income-tax Act, 2025 introduces a more structured and principle-based framework for valuation, particularly in relation to unquoted shares. Unlike listed securities where market price provides an objective benchmark, unquoted shares require a method-driven determination of value, making valuation a critical component of tax computation.

Valuation under the new regime is not an independent exercise but is embedded within various charging and computation provisions. Sections such as 26(2)(j), 72, and 92 rely on the concept of fair market value (FMV) for determining taxable income, capital gains, or value of transactions. The operational mechanism for such valuation is provided through prescribed rules, including Rule 57 of the Income-tax Rules, 2026.

This integrated framework ensures that valuation is aligned with economic reality while preventing tax arbitrage and under-reporting of transaction values.

For a detailed analysis of the statutory provisions and valuation rules under the new regime, refer to our comprehensive guide on valuation under the Income-tax Act, 2025 including relevant sections and rules.

Legal Triggers for Valuation of Unquoted Shares (Section-wise Analysis)

Valuation of unquoted shares becomes relevant only when triggered by specific provisions under the Act. The following sections form the backbone of such triggers:

Section 26(2)(j) – Income Inclusion Based on FMV

Section 26(2)(j) provides for taxation of income where the value of property or benefit is determined based on fair market value. In the context of unquoted shares, this provision becomes relevant in cases where shares are received or transferred without adequate consideration or where valuation is necessary to compute taxable income.

The section ensures that transactions involving unlisted shares are not undervalued to reduce tax liability. FMV acts as a benchmark to determine the real economic value of the transaction, thereby preventing tax leakage.

Section 72 – Determination of Value for Capital Gains

Section 72 plays a critical role in capital gains taxation by allowing the substitution of fair market value in certain circumstances. In cases involving transfer of unquoted shares, where consideration may not reflect true value, FMV becomes the basis for computing capital gains.

This is particularly relevant in:

• Related party transactions
• Internal group restructuring
• Transfers without explicit consideration

The section ensures that capital gains are computed on a fair and reasonable basis, aligned with market realities rather than contractual values.

In practical scenarios involving transfer of unquoted shares, detailed valuation considerations become critical for determining accurate capital gains. You can explore this further in our guide on valuation of transfer of unquoted equity shares under the Income-tax Act.

Section 92 – Valuation of Property and Share Transactions

Section 92 governs valuation principles for property and share-related transactions, ensuring that such transactions are carried out at fair value. It reinforces the requirement that valuation must reflect an arm’s length standard.

For unquoted shares, this provision becomes critical in:

• Share issuance at premium
• Transfer of shares between connected parties
• Cross-border or structured transactions

The objective is to ensure consistency in valuation and to align tax treatment with actual economic substance.

Classification Framework: Listed vs Unquoted Shares

A fundamental distinction under the valuation framework is between listed and unquoted shares.

• Listed shares derive their value from observable market prices on recognized stock exchanges.
• Unquoted shares, on the other hand, do not have a readily available market price and therefore require determination through prescribed valuation methodologies.

This distinction is critical because it shifts the valuation approach from price-based determination to method-based computation. For unquoted shares, valuation is inherently judgment-driven and must be supported by robust methodologies and assumptions.

Rule 57 – Valuation of Unquoted Shares (Core Framework)

Rule 57 under the Income-tax Rules, 2026 provides the operational framework for valuation of unquoted shares. It mandates that the fair market value of such shares must be determined using internationally accepted valuation methodologies on an arm’s length basis.

Legal Requirement

The Rule requires that valuation be carried out by a qualified professional, such as a merchant banker or an accountant, using recognized valuation approaches. The emphasis is not on prescribing a single method but on ensuring that the selected methodology is:

• Scientifically accepted
• Consistent with valuation principles
• Capable of withstanding scrutiny

This approach provides flexibility while maintaining regulatory discipline.

Core Valuation Principles under Rule 57

While the Rule allows flexibility in method selection, certain overarching principles must be adhered to:

• Arm’s Length Standard: Valuation must reflect what an independent buyer would pay in an open market.
• Consistency: The method selected should be consistently applied and justified.
• Substance over Form: Valuation must capture the economic substance of the business.
• Documentation: Assumptions and inputs must be adequately supported.

These principles ensure that valuation is not merely a computational exercise but a defensible professional judgment.

Interaction of Sections and Rule 57 – Integrated Framework

A key feature of the new regime is the interaction between statutory provisions and valuation rules.

This integrated approach ensures:

• Uniformity in valuation
• Reduced ambiguity
• Alignment between legal provisions and valuation practices

Key Challenges in Valuation of Unquoted Shares

Despite a structured framework, valuation of unquoted shares remains complex due to the following factors:

Subjectivity in Assumptions

Valuation often involves projections, discount rates, and growth assumptions, which may vary significantly between valuers and tax authorities.

Absence of Market Benchmark

Unlike listed shares, unquoted shares lack a direct market reference, increasing reliance on models and assumptions.

Regulatory Scrutiny

Valuations are increasingly scrutinized in tax assessments, especially in:

• Startup funding rounds
• Share premium cases
• Group restructuring

Divergence in Valuation Outcomes

Different methodologies may yield different values, leading to potential disputes and litigation.

Key Takeaways

• Valuation of unquoted shares under the Income-tax Act, 2025 is method-driven and law-triggered.
• Sections 26(2)(j), 72, and 92 define the circumstances where valuation becomes critical.
• Rule 57 provides flexibility in methodology but requires adherence to valuation principles.
• FMV acts as a central concept ensuring fairness and preventing tax avoidance.
• Professional judgment, supported by robust documentation, is essential for defensible valuation.

FAQs

How is FMV of unquoted shares determined under the Income-tax Act, 2025?

FMV is determined using internationally accepted valuation methods as prescribed under Rule 57, based on an arm’s length principle.

Is there a mandatory valuation method for unquoted shares?

No specific method is mandated. However, the method adopted must be recognized, justified, and appropriate to the nature of the business.

When does Section 26(2)(j) apply to share valuation?

It applies where income is required to be computed based on the fair market value of property or benefit, including shares.

How does Section 72 impact valuation?

Section 72 allows substitution of FMV in capital gains computation where actual consideration does not reflect true value.

Why is Section 92 relevant for unquoted shares?

It ensures that transactions involving shares are valued at fair and arm’s length value, especially in related party or structured transactions.

Conclusion

The valuation of unquoted shares under the Income-tax Act, 2025 represents a shift towards a principle-based, method-driven framework. By integrating statutory provisions with flexible valuation rules, the law seeks to balance accuracy, fairness, and compliance.

For professionals and businesses, the focus must now move beyond mere compliance to robust valuation practices, supported by sound assumptions and defensible methodologies. In an environment of increasing scrutiny, valuation is no longer a peripheral exercise—it is central to tax risk management and transaction structuring.