Rule 3 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
The second half of rule 3 values foreign shares and securities, whether quoted or unquoted, and an interest in a partnership firm, association of persons or limited liability partnership. It also says how a foreign-currency value is converted into rupees (sub-rules (4) and (5)), defines the terms used (Explanation 1) and fixes the valuation date (Explanation 2). It implements section 3(2) of the Act.
As per the Rules as notified on 2 July 2015 (G.S.R. 529(E)), quoted shares and securities are valued at the higher of cost and the average of the lowest and highest price on an established securities market on the valuation date. Unquoted equity shares follow a formula, (A+B-L) x (PV/PE), and the higher of that and cost. Other unquoted securities are valued at the higher of cost and open-market price on a valuer's report. An interest in a firm is valued from its net assets. The valuation date for an asset declared under section 59 is 1 July 2015; in any other case, 1 April of the previous year.
Where this fits
Rule 3(1) is the valuation rule made under section 3(2) of the Act. The first part, on bullion, art, immovable property and bank accounts, is in our article on rule 3 for bullion, art, property and bank accounts. The charge it feeds is explained in our article on section 3. If you hold foreign shares or a stake in an overseas firm, our NRI tax filing team can help you apply the rule to your holdings.
Rule 3(1)(c)(I): quoted shares and securities
The fair market value is the higher of (i) the cost of acquisition and (ii) the price determined as follows:
- (A) the average of the lowest and highest price of the shares and securities quoted on any established securities market on the valuation date; or
- (B) where there is no trading on that market on the valuation date, the average of the lowest and highest price on an established securities market on the date immediately preceding the valuation date when they were traded.
Rule 3(1)(c)(II): unquoted equity shares
The fair market value is the higher of (i) the cost of acquisition and (ii) the value on the valuation date determined by this formula as printed:
Fair market value of unquoted equity shares = (A + B - L) x (PV / PE)
where:
| Symbol | Meaning as printed |
|---|---|
| A | Book value of all assets (other than bullion, jewellery, precious stone, artistic work, shares, securities and immovable property), as reduced by (i) any amount of income-tax paid, less any income-tax refund claimed, and (ii) any amount shown as an asset, including the unamortised amount of deferred expenditure, which does not represent the value of any asset |
| B | Fair market value of bullion, jewellery, precious stone, artistic work, shares, securities and immovable property, determined in the manner provided in the rule |
| L | Book value of liabilities, but not including the six amounts listed below |
| PE | Total amount of paid-up equity share capital as shown in the balance sheet |
| PV | The paid-up value of such equity shares |
The amounts excluded from L are: (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than the amount of income-tax paid, less the amount claimed as refund, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; and (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares.
In plain words, the formula takes the company's assets, replaces the book figure for the bullion, art, shares, securities and immovable property with their fair market values, subtracts the liabilities (without the six listed items), and then takes the proportion that the shareholder's paid-up value bears to the total paid-up equity capital.
Rule 3(1)(c)(III): other unquoted shares and securities
The fair market value of an unquoted share and security other than an equity share in a company is the higher of (i) cost of acquisition and (ii) the price it would ordinarily fetch if sold in the open market on the valuation date, for which the assessee may obtain a report from a valuer recognised by the Government of a country or specified territory outside India, or any of its agencies, for the valuation of share and security.
Rule 3(1)(f) and (g): interest in a firm, AOP or LLP
Clause (f) says the value of a person's interest in a partnership firm, an association of persons or a limited liability partnership of which he is a member is determined as specified in clause (g).
Clause (g) says the net asset of the firm, association or LLP on the valuation date is determined first. The portion of the net wealth equal to the amount of its capital is allocated among the partners or members in the proportion in which capital has been contributed. The residue is allocated in accordance with the agreement for distribution of assets on dissolution or, failing an agreement, in the proportion in which they are entitled to share profits. The sum total allocated to a partner or member is treated as the value of his interest.
The Explanation to the clause says the net asset is (A + B - L), determined in the manner provided in sub-clause (II) of clause (c), that is, the same A, B and L as in the unquoted equity share formula.
A drafting point: clause (g) begins "The net asset of the firm ...", which reads as a continuation of clause (f) and not as a separate clause. It is quoted as printed and not corrected here.
Rule 3(4) and (5): conversion into rupees
- Sub-rule (4). The fair market value of an asset determined in a currency that is one of the permitted currencies designated by the Reserve Bank of India under the Foreign Exchange Management Regulations is converted into Indian currency at the reference rate of the Reserve Bank of India on the date of valuation.
- Sub-rule (5). Where the value is determined in a currency other than a permitted currency, it is converted into United States Dollar on the date of valuation at the rate specified by the Central Bank of the country or jurisdiction where the asset is located, and the dollar value is then converted into Indian currency at the reference rate of the Reserve Bank of India on the date of valuation. The proviso: if that Central Bank does not specify a rate from its local currency to the dollar, the rate is the one specified by any other bank regulated under the laws of that country or jurisdiction.
The Foreign Exchange Management Regulations are named as printed; the current regulations should be checked.
Explanation 1: definitions
For the purposes of the rule:
- "Established securities market" means an exchange officially recognised and supervised by a Governmental entity in which the market is located and that has a meaningful annual value of shares traded on the exchange.
- "Meaningful annual value of shares traded" means an annual value of shares traded exceeding one billion United States Dollar during each of the three calendar years immediately preceding the calendar year of the determination.
- "Meaningful volume of trading on an on-going basis" for each class of shares means trades in the class, other than in de minimis quantities, on one or more established securities markets on at least sixty business days during the prior calendar year, and the aggregate number of shares traded in the prior year at least ten per cent. of the average number of shares outstanding in the class during that year.
- "Quoted share or security" means one that has a meaningful volume of trading on an ongoing basis on an established securities market and is regularly quoted by dealers who actively offer to, and in fact do, purchase from and sell to customers who are not related to the dealer in the ordinary course of business.
- "Unquoted share and security" means one that is not a quoted share or security.
Explanation 2: the valuation date
For determining the market value as on the valuation date referred to in sub-rule (1), and for conversion into Indian currency or from foreign currency into United States Dollar and then into Indian currency, the date shall be:
- (a) in respect of an asset declared under section 59 of the Act, the 1st day of July, 2015;
- (b) in any other case, the 1st day of April of the previous year.
The 1 July 2015 date sits beside section 1(3) of the Act, which prints 1 April 2016 for the coming into force of the Act. The instrument that links the two is not in the sources, and this article gives no other date. The declaration window is explained in our article on section 59 and is closed on the face of the sources.
At a glance
| Clause or sub-rule | Subject | Measure (as notified in 2015) |
|---|---|---|
| 3(1)(c)(I) | Quoted shares and securities | Higher of cost and average of lowest and highest price on the valuation date (or the last trading date before it) |
| 3(1)(c)(II) | Unquoted equity shares | Higher of cost and (A+B-L) x (PV/PE) |
| 3(1)(c)(III) | Other unquoted shares and securities | Higher of cost and open-market price on a recognised valuer's report |
| 3(1)(f), (g) | Interest in a firm, AOP or LLP | Share of net assets: capital proportion, then residue by agreement or profit-share |
| 3(4) | Permitted currencies | RBI reference rate on the date of valuation |
| 3(5) | Other currencies | Into US Dollar at the local Central Bank rate, then into rupees at the RBI reference rate |
| Explanation 2 | Valuation date | 1 July 2015 for assets declared under section 59; otherwise 1 April of the previous year |
A worked example
Shyam Nambiar holds foreign shares in an overseas company that is not quoted. The company's books show, on the valuation date, assets (other than the excluded classes) of 60 units after the printed reductions, property and other listed assets at fair market value 40 units, and liabilities (without the excluded items) of 20 units. Shyam holds a paid-up value of 10 units out of total paid-up equity capital of 100 units. The formula gives (60 + 40 - 20) x (10 / 100) = 8 units. If his cost of acquisition was 5 units, the fair market value is the higher figure, 8 units, converted into rupees under sub-rule (4) or (5) at the date of valuation. The numbers are invented and are not a statement about any real company.
Points the text leaves open
The rule does not say which valuer is "recognised" beyond the words "recognised by the Government of a country or specified territory outside India or any of its agencies". It does not say what "specified territory" means; the Act uses the term without a separate definition. It does not say how a share that is part-quoted, or a class that fails the volume tests, is to be treated beyond the definitions in Explanation 1. This article does not add anything on those points.
References and what to check
The rule is read as notified on 2 July 2015, and later amendment rules should be checked. References to the Income-tax Act and the Foreign Exchange Management Regulations are as printed in 2015; the current law should be checked.
Need help valuing foreign shares or a firm interest?
If you hold overseas shares or a stake in a foreign firm, our NRI tax filing team can go through the formula, the valuation date and the conversion rules with you and your records.
Key takeaways
- Quoted shares: higher of cost and the average of the lowest and highest price on the valuation date or the last trading day before it.
- Unquoted equity shares: higher of cost and (A+B-L) x (PV/PE).
- Other unquoted securities: higher of cost and open-market price on a recognised valuer's report.
- An interest in a firm, AOP or LLP is a share of net assets, capital first and then the residue.
- Foreign currency is converted at the RBI reference rate, through United States Dollar where the currency is not a permitted one.
- The valuation date is 1 July 2015 for an asset declared under section 59; otherwise 1 April of the previous year.
Read next
- Rule 3: fair market value of bullion, art, property and bank accounts
- Section 3: charge of tax on undisclosed foreign income and asset
- Section 59: declaration of undisclosed foreign asset
- Tax on foreign income for residents: DTAA relief
Disclaimer: Based on the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 as enacted and published in the Gazette of India on 27 May 2015, and on the Rules of 2015 as notified on 2 July 2015, as consulted on 2 October 2026. Later Finance Act amendments, amendment rules and the current income-tax law should be checked. This article is general information, not legal advice; check the official text before acting.