The valuation of unquoted equity shares is one of the most critical and frequently contested areas in tax compliance. Rule 57 of the Income Tax Rules, 2026 establishes a comprehensive formula for determining the Fair Market Value of unquoted equity shares for the purposes of Sections 26(2)(j), 72, and 92 of the Income Tax Act, 2025.
The Complete Formula
The fair market value of unquoted equity shares is determined using the following formula:
FMV = (A + B + C + D − L) × (PV ÷ PE)
Component A: Book Value of Assets
A represents the book value of all assets (other than jewellery, artistic works, shares, securities, and immovable property) as appearing in the balance sheet. The following deductions are required:
- Any amount of income-tax paid, less the amount of income-tax refund claimed
- Any amount shown as asset including the unamortised amount of deferred expenditure which does not represent the value of any asset
This adjustment ensures that the valuation reflects real economic value rather than accounting conventions.
Component B: Jewellery and Artistic Works
B represents the price which jewellery and artistic works would fetch if sold in the open market, based on a valuation report obtained from a registered valuer. For valuations under this formula:
- Jewellery includes ornaments made of gold, silver, platinum, or any other precious metal or alloy, with or without precious or semi-precious stones
- Artistic works include archaeological collections, drawings, paintings, sculptures, and any work of art
Component C: Shares and Securities
C represents the fair market value of shares and securities as determined in the manner provided in Rule 57:
- Quoted shares: Transaction value if traded through a recognised stock exchange; otherwise, the lowest quoted price on the valuation date or immediately preceding trading date
- Unquoted shares (other than equity): Open market price determined by a merchant banker or accountant
Component D: Immovable Property
D represents the value adopted, assessed, or assessable by any authority of the Government for the purpose of payment of stamp duty in respect of the immovable property.
Component L: Liabilities
L represents the book value of liabilities as appearing in the balance sheet, but specifically excluding:
- The paid-up capital in respect of equity shares
- The amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting
- Reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation
- Any amount representing provision for taxation, other than amount of income-tax paid (net of refund claimed), to the extent of the excess over the tax payable with reference to the book profits
- Any amount representing provisions made for meeting liabilities, other than ascertained liabilities
- Any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares
PV and PE: The Proportionate Adjustment
PV represents the paid-up value of such equity shares, and PE represents the total amount of paid-up equity share capital as shown in the balance sheet. The ratio (PV ÷ PE) ensures that the valuation is proportionate to the specific shareholding being valued.
A Practical Example
Consider a company with the following balance sheet figures:
| Component | Amount (₹) |
|---|---|
| Book value of assets (excluding jewellery, artistic works, shares, securities, immovable property) | 10,00,00,000 |
| Jewellery and artistic works (registered valuer report) | 50,00,000 |
| FMV of shares and securities | 20,00,000 |
| Stamp duty value of immovable property | 30,00,000 |
| Book value of liabilities (as adjusted) | 40,00,000 |
| Paid-up value of equity share (PV) | 100 |
| Total paid-up equity share capital (PE) | 10,00,000 |
A + B + C + D − L = 10,00,00,000 + 50,00,000 + 20,00,000 + 30,00,000 − 40,00,000 = 10,60,00,000
FMV per share = 10,60,00,000 × (100 ÷ 10,00,000) = 10,60,00,000 × 0.0001 = ₹10,600
When Merchant Banker Valuation Is Required
For unquoted shares and securities other than equity shares, the FMV is determined by a merchant banker or an accountant. This applies to:
- Preference shares
- Debentures
- Bonds
- Other non-equity instruments
Common Pitfalls and Compliance Issues
Incorrect Liability Exclusion: The most common error is failing to properly exclude reserves, surplus, and unascertained liabilities from the liability side. These must be excluded regardless of the resulting figure.
Stale Valuations: The valuation must be as on the specified date. Using balance sheet figures from a different date can result in incorrect valuations.
Registered Valuer Requirements: For jewellery and artistic works exceeding ₹5,00,000, a registered valuer's report is mandatory.
Stamp Duty Value: The stamp duty value must be the value as on the valuation date, not a historical value.
Expert Legal Guidance
Valuing unquoted equity shares correctly is essential for tax compliance in transactions such as share transfers, capital gains computation, and income from other sources. Anuj Desai & Associates provides expert advisory services on Direct Tax Code compliance, helping taxpayers navigate the valuation formula and avoid disputes with tax authorities.