The Draft Income Tax Rules, 2026 have introduced a comprehensive framework for taxation of indirect transfers involving foreign entities deriving value from Indian assets. Rules 11 and 12 provide detailed mechanisms for determining Fair Market Value (FMV) and computing income attributable to assets located in India.
These provisions operationalise Section 9(2) of the Income-tax Act, 2025 and are expected to significantly impact cross-border mergers, offshore share transfers, private equity exits, and multinational restructuring transactions.
Rule 11: Structured Fair Market Value (FMV) Determination Framework
Rule 11 lays down a detailed methodology for determining the fair market value of assets held directly or indirectly by a foreign company or entity when such assets derive substantial value from India.
Key Highlights
1) Listed Indian Company Shares
If the asset is a share of an Indian company listed on a recognised stock exchange:
- FMV will be the observable market price.
- Where shares confer management or control rights, FMV will be computed using a formula:
FMV = (Market Capitalisation + Book Value of Liabilities) ÷ Total Outstanding Shares
If shares are listed on multiple exchanges, valuation will be based on the exchange with the highest trading volume.
2) Unlisted Indian Company Shares
For unlisted shares:
- FMV must be determined by a merchant banker or accountant
- Valuation must follow internationally accepted methodologies
- Liabilities considered in valuation must be added back
This formalises valuation standards in indirect transfer scenarios.
3) Partnership Firms and Association of Persons
Where the asset is an interest in a partnership firm or AOP:
- Entity valuation must be conducted by a merchant banker or accountant
- Value allocated to partners based on capital contribution
- Residual value allocated per partnership agreement
- In absence of agreement, allocation based on profit-sharing ratio
4) Foreign Company Asset Valuation
Rule 11 also provides four separate FMV computation mechanisms depending on whether:
- Transfer is between connected or non-connected persons
- Foreign company shares are listed
- Listed on multiple exchanges
- Unlisted
In all cases, FMV = Market Capitalisation + Book Value of Liabilities or valuation-based FMV plus liabilities.
5) Exchange Rate Rule
For foreign currency computation, telegraphic transfer buying rate on the specified date must be used.
Rule 12: Formula for Income Attribution to Indian Assets
Rule 12 introduces a mathematical formula to determine taxable income attributable to Indian assets when foreign shares are transferred offshore.
Attribution Formula:
Taxable Income = A × (B ÷ C)
Where:
- A = Total income from transfer (as if share located in India)
- B = FMV of Indian assets
- C = FMV of all global assets of the foreign entity
This formula ensures only the proportion of income attributable to Indian assets is taxed in India.
Compliance Requirement
Transferors must:
- Obtain accountant certification in the prescribed Form No. 4
- Furnish report along with return of income
- Certify correctness of income attribution
Failure to provide required information empowers the Assessing Officer to determine income in a suitable manner.
Impact on Cross-Border Transactions
The new rules are particularly relevant for:
- Private equity exits through offshore holding structures
- MNC group restructurings
- Foreign share transfers involving Indian subsidiaries
- Global acquisition deals
By prescribing formula-based attribution and structured FMV computation, the government aims to reduce valuation disputes while strengthening indirect transfer taxation enforcement.
Greater Certainty but Higher Compliance
While the introduction of a clear formula improves predictability, the compliance burden increases due to:
- Mandatory valuation certification
- Detailed asset-level computation
- Accountant reporting requirement
- Global asset valuation disclosure
Tax professionals expect these rules to significantly influence transaction structuring and due diligence in cross-border deals involving Indian assets.
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