The Assessing Officer says my ESOP perquisite should have been computed on a higher share value than my employer used. What is the prescribed method for fixing the fair market value on the date I exercised?
This is stage one — the fair market value that fixes the perquisite under s.17(2)(vi) on exercise. For an equity share LISTED on a recognised stock exchange, Rule 3(8)(ii) takes the AVERAGE OF THE OPENING PRICE AND THE CLOSING PRICE of the share on the date of exercise on that exchange; where it is listed on more than one exchange, the exchange with the highest volume of trading in the share; and where there is no trading in the share at all on the date of exercise, the closing price on the recognised stock exchange on the date closest to and immediately preceding the exercise date. For an equity share NOT listed, Rule 3(8)(iii) takes such value as is determined by a merchant banker on the "specified date", and Rule 3(9) applies the same merchant-banker method to a specified security that is not an equity share. The "specified date" is the date of exercise, or any earlier date NOT MORE THAN 180 DAYS BEFORE THE DATE OF EXERCISE — this is the point most often got wrong.
Decided by the CBDT Circulars & Instructions (Not applicable — statutory text), reported as Rule 3(8) and Rule 3(9) of the Income-tax Rules, 1962, as hosted at indiankanoon.org/doc/45530783/, the rule stating its own commencement with effect from 1 April 2009 at its sub-rule (10) (no "Year:" stamp is printed on any departmental rule page, and no departmental page for this rule could be located); Rule 3(8) corroborated at para 6.3 of ITA No. 12/MUM/2022 (ITAT Mumbai, 16 September 2022) and at para 3 of ITA No. 2061/Del/2023 (ITAT Delhi, 8 January 2025). It bears on section Rule 3(8), section Rule 3(9), section Rule 3, section 17(2)(vi), section 49(2AA), section 192 of the Income Tax Act 1961, in Salary & Perquisites, TDS Defaults, How Tax Law Is Read and Capital Gains matters.
The whole two-stage charge turns on this one number: it is the top of the salary perquisite at stage one and, under s.49(2AA), the cost of acquisition at stage two on sale. Three practical points. First, for listed shares the rule is an AVERAGE of opening and closing price, not the closing price, not the last traded price and not the price the employee actually got when he sold. Second, for unlisted shares the rule prescribes a person — a category I merchant banker registered with SEBI — and a date window, and nothing else; the Assessing Officer cannot substitute a price at which the company happened to place shares with an outside investor around the same time, and two Tribunals have said so on facts of exactly that kind. Third, the 180-day window is a backward window only: a valuation dated after the exercise date is outside the rule altogether, and a valuation more than 180 days before it is equally outside. Rule 3(8)(iv) also defines the vocabulary the rule uses: "closing price" is the price of the last settlement on that date on that exchange (and, where the exchange quotes both buy and sell prices, the sell price of the last settlement), "opening price" the price of the first settlement on the same footing, "merchant banker" a category I merchant banker registered with SEBI under s.3 of the SEBI Act, 1992, and "recognised stock exchange" the meaning in s.2(f) of the Securities Contracts (Regulation) Act, 1956.
Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them.
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Rule 3(8) reads: "(i) For the purposes of sub-clause (vi) of clause (2) of section 17, the fair market value of any specified security or sweat equity share, being an equity share in a company, on the date on which the option is exercised by the employee, shall be determined in accordance with the provisions of clause (ii) or clause (iii). (ii) In a case where, on the date of the exercising of the option, the share in the company is listed on a recognized stock exchange, the fair market value shall be the average of the opening price and closing price of the share on that date on the said stock exchange : Provided that where, on the date of exercising of the option, the share is listed on more than one recognized stock exchanges, the fair market value shall be the average of opening price and closing price of the share on the recognised stock exchange which records the highest volume of trading in the share : Provided further that where, on the date of exercising of the option, there is no trading in the share on any recognized stock exchange, the fair market value shall be- (a) the closing price of the share on any recognised stock exchange on a date closest to the date of exercising of the option and immediately preceding such date; or (b) the closing price of the share on a recognised stock exchange, which records the highest volume of trading in such share, if the closing price, as on the date closest to the date of exercising of the option and immediately preceding such date, is recorded on more than one recognized stock exchange. (iii) In a case where, on the date of exercising of the option, the share in the company is not listed on a recognised stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker on the specified date. (iv) For the purpose of this sub-rule,- (a) "closing price" of a share on a recognised stock exchange on a date shall be the price of the last settlement on such date on such stock exchange : Provided that where the stock exchange quotes both "buy" and "sell" prices, the closing price shall be the "sell" price of the last settlement; (b) "merchant banker" means category I merchant banker registered with Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); (c) "opening price" of a share on a recognised stock exchange on a date shall be the price of the first settlement on such date on such stock exchange : Provided that where the stock exchange quotes both "buy" and "sell" prices, the opening price shall be the "sell" price of the first settlement; (d) "recognised stock exchange" shall have the same meaning assigned to it in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (e) "specified date" means,- (i) the date of exercising of the option; or (ii) any date earlier than the date of the exercising of the option, not being a date which is more than 180 days earlier than the date of the exercising." Rule 3(9) reads: "For the purposes of sub-clause (vi) of clause (2) of section 17, the fair market value of any specified security, not being an equity share in a company, on the date on which the option is exercised by the employee, shall be such value as determined by a merchant banker on the specified date. Explanation. - For the purposes of this sub-rule, "merchant banker" and "specified date" shall have the meanings assigned to them in sub-clause (b) and sub-clause (e) respectively of clause (iv) of sub-rule (8)."
Not a judgment. The statutory position is that the fair market value which sets the s.17(2)(vi) perquisite is fixed exclusively by Rule 3(8) for an equity share and by Rule 3(9) for a specified security that is not an equity share; that for a listed equity share it is the average of the opening and closing price on the date of exercise, with a highest-volume rule where more than one exchange is involved and a nearest-preceding-date rule where there was no trading; that for an unlisted equity share it is the value determined by a category I merchant banker registered with SEBI on the specified date; and that the specified date is the date of exercise or any earlier date not more than 180 days before it.
Not a judgment; no judicial reasoning is stated for the rules themselves. On their operation, the ITAT Mumbai in Sula Vineyards held at paragraph 6.4 that on a plain reading of the rules the fair market value of unlisted shares was to be taken as determined by the merchant banker and that there was no basis for adopting instead a value drawn from an independent sale of the company's shares between unrelated parties, and the ITAT Delhi in Bidhan Chandra Choudhary held at paragraphs 5 to 5.2 that a valuation made under the Reserve Bank of India's foreign direct investment pricing guidelines on a discounted free cash flow basis "would not apply" because the two sets of provisions "deal with altogether different situations".
(e) "specified date" means,- (i) the date of exercising of the option; or (ii) any date earlier than the date of the exercising of the option, not being a date which is more than 180 days earlier than the date of the exercising.
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Handle my notice → Ask a CA on WhatsAppThis is stage one — the fair market value that fixes the perquisite under s.17(2)(vi) on exercise. For an equity share LISTED on a recognised stock exchange, Rule 3(8)(ii) takes the AVERAGE OF THE OPENING PRICE AND THE CLOSING PRICE of the share on the date of exercise on that exchange; where it is listed on more than one exchange, the exchange with the highest volume of trading in the share; and where there is no trading in the share at all on the date of exercise, the closing price on the recognised stock exchange on the date closest to and immediately preceding the exercise date. For an equity share NOT listed, Rule 3(8)(iii) takes such value as is determined by a merchant banker on the "specified date", and Rule 3(9) applies the same merchant-banker method to a specified security that is not an equity share. The "specified date" is the date of exercise, or any earlier date NOT MORE THAN 180 DAYS BEFORE THE DATE OF EXERCISE — this is the point most often got wrong. This was decided by the CBDT Circulars & Instructions (Not applicable — statutory text) and bears on section Rule 3(8), section Rule 3(9), section Rule 3, section 17(2)(vi), section 49(2AA), section 192 of the Income Tax Act 1961. It is reported as Rule 3(8) and Rule 3(9) of the Income-tax Rules, 1962, as hosted at indiankanoon.org/doc/45530783/, the rule stating its own commencement with effect from 1 April 2009 at its sub-rule (10) (no "Year:" stamp is printed on any departmental rule page, and no departmental page for this rule could be located); Rule 3(8) corroborated at para 6.3 of ITA No. 12/MUM/2022 (ITAT Mumbai, 16 September 2022) and at para 3 of ITA No. 2061/Del/2023 (ITAT Delhi, 8 January 2025). The whole two-stage charge turns on this one number: it is the top of the salary perquisite at stage one and, under s.49(2AA), the cost of acquisition at stage two on sale. Three practical points. First, for listed shares the rule is an AVERAGE of opening and closing price, not the closing price, not the last traded price and not the price the employee actually got when he sold. Second, for unlisted shares the rule prescribes a person — a category I merchant banker registered with SEBI — and a date window, and nothing else; the Assessing Officer cannot substitute a price at which the company happened to place shares with an outside investor around the same time, and two Tribunals have said so on facts of exactly that kind. Third, the 180-day window is a backward window only: a valuation dated after the exercise date is outside the rule altogether, and a valuation more than 180 days before it is equally outside. Rule 3(8)(iv) also defines the vocabulary the rule uses: "closing price" is the price of the last settlement on that date on that exchange (and, where the exchange quotes both buy and sell prices, the sell price of the last settlement), "opening price" the price of the first settlement on the same footing, "merchant banker" a category I merchant banker registered with SEBI under s.3 of the SEBI Act, 1992, and "recognised stock exchange" the meaning in s.2(f) of the Securities Contracts (Regulation) Act, 1956. If it applies to you, the first step is this: Establish first whether the share was LISTED on a recognised stock exchange on the date of exercise. Everything else follows from that single fact.
Rule 3(8) reads: "(i) For the purposes of sub-clause (vi) of clause (2) of section 17, the fair market value of any specified security or sweat equity share, being an equity share in a company, on the date on which the option is exercised by the employee, shall be determined in accordance with the provisions of clause (ii) or clause (iii). (ii) In a case where, on the date of the exercising of the option, the share in the company is listed on a recognized stock exchange, the fair market value shall be the average of the opening price and closing price of the share on that date on the said stock exchange : Provided that where, on the date of exercising of the option, the share is listed on more than one recognized stock exchanges, the fair market value shall be the average of opening price and closing price of the share on the recognised stock exchange which records the highest volume of trading in the share : Provided further that where, on the date of exercising of the option, there is no trading in the share on any recognized stock exchange, the fair market value shall be- (a) the closing price of the share on any recognised stock exchange on a date closest to the date of exercising of the option and immediately preceding such date; or (b) the closing price of the share on a recognised stock exchange, which records the highest volume of trading in such share, if the closing price, as on the date closest to the date of exercising of the option and immediately preceding such date, is recorded on more than one recognized stock exchange. (iii) In a case where, on the date of exercising of the option, the share in the company is not listed on a recognised stock exchange, the fair market value shall be such value of the share in the company as determined by a merchant banker on the specified date. (iv) For the purpose of this sub-rule,- (a) "closing price" of a share on a recognised stock exchange on a date shall be the price of the last settlement on such date on such stock exchange : Provided that where the stock exchange quotes both "buy" and "sell" prices, the closing price shall be the "sell" price of the last settlement; (b) "merchant banker" means category I merchant banker registered with Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); (c) "opening price" of a share on a recognised stock exchange on a date shall be the price of the first settlement on such date on such stock exchange : Provided that where the stock exchange quotes both "buy" and "sell" prices, the opening price shall be the "sell" price of the first settlement; (d) "recognised stock exchange" shall have the same meaning assigned to it in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956); (e) "specified date" means,- (i) the date of exercising of the option; or (ii) any date earlier than the date of the exercising of the option, not being a date which is more than 180 days earlier than the date of the exercising." Rule 3(9) reads: "For the purposes of sub-clause (vi) of clause (2) of section 17, the fair market value of any specified security, not being an equity share in a company, on the date on which the option is exercised by the employee, shall be such value as determined by a merchant banker on the specified date. Explanation. - For the purposes of this sub-rule, "merchant banker" and "specified date" shall have the meanings assigned to them in sub-clause (b) and sub-clause (e) respectively of clause (iv) of sub-rule (8)." It was decided by the CBDT Circulars & Instructions (Not applicable — statutory text). On those facts the CBDT Circulars & Instructions held as follows. Not a judgment. The statutory position is that the fair market value which sets the s.17(2)(vi) perquisite is fixed exclusively by Rule 3(8) for an equity share and by Rule 3(9) for a specified security that is not an equity share; that for a listed equity share it is the average of the opening and closing price on the date of exercise, with a highest-volume rule where more than one exchange is involved and a nearest-preceding-date rule where there was no trading; that for an unlisted equity share it is the value determined by a category I merchant banker registered with SEBI on the specified date; and that the specified date is the date of exercise or any earlier date not more than 180 days before it.
Not a judgment; no judicial reasoning is stated for the rules themselves. On their operation, the ITAT Mumbai in Sula Vineyards held at paragraph 6.4 that on a plain reading of the rules the fair market value of unlisted shares was to be taken as determined by the merchant banker and that there was no basis for adopting instead a value drawn from an independent sale of the company's shares between unrelated parties, and the ITAT Delhi in Bidhan Chandra Choudhary held at paragraphs 5 to 5.2 that a valuation made under the Reserve Bank of India's foreign direct investment pricing guidelines on a discounted free cash flow basis "would not apply" because the two sets of provisions "deal with altogether different situations". In the words reproduced by the source cited on this page: "(e) "specified date" means,- (i) the date of exercising of the option; or (ii) any date earlier than the date of the exercising of the option, not being a date which is more than 180 days earlier than the date of the exercising."
It was decided by the CBDT Circulars & Instructions and is reported as Rule 3(8) and Rule 3(9) of the Income-tax Rules, 1962, as hosted at indiankanoon.org/doc/45530783/, the rule stating its own commencement with effect from 1 April 2009 at its sub-rule (10) (no "Year:" stamp is printed on any departmental rule page, and no departmental page for this rule could be located); Rule 3(8) corroborated at para 6.3 of ITA No. 12/MUM/2022 (ITAT Mumbai, 16 September 2022) and at para 3 of ITA No. 2061/Del/2023 (ITAT Delhi, 8 January 2025). Binding on the department, not on the assessee or the courts. An assessee may rely on a circular that is beneficial to them. A CBDT circular or instruction binds officers of the department but not the assessee and not the courts. Where a circular helps you, you may hold the department to it. Where it hurts you, it cannot override the Act or a judgment. On section Rule 3(8), section Rule 3(9), section Rule 3, section 17(2)(vi), section 49(2AA), section 192, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It cuts both ways and is cited by both sides. Not a judgment. The statutory position is that the fair market value which sets the s.17(2)(vi) perquisite is fixed exclusively by Rule 3(8) for an equity share and by Rule 3(9) for a specified security that is not an equity share; that for a listed equity share it is the average of the opening and closing price on the date of exercise, with a highest-volume rule where more than one exchange is involved and a nearest-preceding-date rule where there was no trading; that for an unlisted equity share it is the value determined by a category I merchant banker registered with SEBI on the specified date; and that the specified date is the date of exercise or any earlier date not more than 180 days before it. It arises in Salary & Perquisites, TDS Defaults, How Tax Law Is Read and Capital Gains matters, on section Rule 3(8), section Rule 3(9), section Rule 3, section 17(2)(vi), section 49(2AA), section 192 of the Income Tax Act 1961, and was decided by Not applicable — statutory text. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For a listed share, obtain the opening and closing quotations for the exercise date from the exchange, average them, and check the employer used that average. If there was no trading that day, go to the closing price on the nearest immediately PRECEDING date, and if that date shows quotations on more than one exchange, take the one with the highest volume of trading. For an unlisted share, obtain the merchant banker's report and check three things on its face: that the valuer is a category I merchant banker registered with SEBI, that the valuation date is either the exercise date or a date not more than 180 days before it, and that the report values the share and not the business. If the Assessing Officer proposes a different figure taken from a third-party share sale, an FDI pricing valuation or a discounted cash flow report, say in terms that Rule 3(8) prescribes an exclusive method, and point to the fact that he has found no defect in the merchant banker's report itself. Keep the report and the workings with your own records, not only the employer's: you will need the identical figure as your cost of acquisition when you sell. For a specified security that is not an equity share — for instance an instrument offered under a plan that is not a share — go to Rule 3(9), which applies the merchant banker and specified date machinery of Rule 3(8)(iv) directly.
Validity check could not be completed. Validity check could not be completed. No page for Rule 3 of the Income-tax Rules, 1962 could be found on incometaxindia.gov.in — every URL tried served a different instrument, and the failures are listed in the editor note — so the rule could not be read on a government site at all. Sub-rule (8) was corroborated on three independent routes and was applied as current law by the ITAT Delhi on 8 January 2025, which is good evidence that it is in force in the form set out here. Sub-rule (9) rests on a single source. Departmental rule pages carry no "Year:" stamp, so neither sub-rule could be dated from a government page; but sub-rule (10) of the same rule states its own commencement, with effect from 1 April 2009, and that sentence was confirmed on two routes. The amending instrument that substituted Rule 3 was not identified. No check of judicial treatment beyond the two orders named was carried out. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
A HEALTH WARNING ON SOURCING, which the reader should weigh before relying on this entry. I could not find a page for Rule 3 of the Income-tax Rules, 1962 anywhere on incometaxindia.gov.in. The URL /w/rule-3 serves the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and the suffixed URLs /w/rule-3-1 to /w/rule-3-20 serve, in order, the Direct Tax Vivad se Vishwas Rules 2020, the Direct Tax Vivad se Vishwas Rules 2024, the Securities Lending Scheme 1997, the Prohibition of Benami Property Transactions Rules 2016, the Direct Tax Dispute Resolution Scheme Rules 2016, three separate scheme pages headed "Scope of the Scheme", the Equalisation levy Rules 2016, the Commodities Transaction Tax Rules 2013, the Centralised Processing of Equalisation Levy Statement Scheme 2023, the Faceless Appeal Scheme 2021, the Electoral Trusts Scheme 2013, the Authority for Advance Rulings appointment Rules 2016, the Electoral Bond Scheme 2018, the Settlement Commission recruitment Rules 2015, the Tribunal (Conditions of Service) Rules 2021, the repealed SEBI ICDR Regulations 2009 and the Companies (Auditor's Report) Order 2020 — every one of them a different instrument. Sub-rule (8) is therefore taken from three sources that agree: the indiankanoon text of Rule 3 of the Income Tax Rules, 1962 at /doc/45530783/, which returned the rule with indiankanoon's own internal hyperlink markup intact; the reproduction of Rule 3(8) at paragraph 6.3 of the ITAT Mumbai order in ACIT (TDS) v. Sula Vineyards Pvt. Ltd. (16 September 2022); and the reproduction of Rule 3(8)(i), (ii) and (iii) at paragraph 3 of the ITAT Delhi order in ACIT v. Bidhan Chandra Choudhary (8 January 2025). Sub-rule (9) rests on the indiankanoon text ALONE — I found no judgment reproducing it and no departmental page — so treat sub-rule (9) as the weakest part of this entry and verify it before relying on it. The extract of Rule 3(8) reproduced in Sula Vineyards is the Assessing Officer's extract and is defective: it prints clause (ii) as a bare opening line with no operative words. Departmental rule pages carry no "Year:" stamp in any event, so no rule can be dated from a departmental page the way a section can. The rule nevertheless dates itself: sub-rule (10), which immediately follows the two sub-rules set out here, reads "This rule shall come into force with effect from the 1st day of April, 2009", and that sentence was read twice, once in the continuous run transcribed from indiankanoon.org/doc/45530783/?type=print and once through the indiankanoon fragment index on the same document, which returns nothing for text that is not in the document. That date is the commencement of the version of Rule 3 in which sub-rules (8) and (9) appear, and it coincides with the replacement of the fringe benefit tax charge on employee share benefits by the perquisite charge on the employee. The AMENDING INSTRUMENT — the notification that substituted Rule 3 — was NOT identified on this pass and is not named here. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Not a judgment. The statutory position is that the fair market value which sets the s.17(2)(vi) perquisite is fixed exclusively by Rule 3(8) for an equity share and by Rule 3(9) for a specified security that is not an equity share; that for a listed equity share it is the average of the opening and closing price on the date of exercise, with a highest-volume rule where more than one exchange is involved and a nearest-preceding-date rule where there was no trading; that for an unlisted equity share it is the value determined by a category I merchant banker registered with SEBI on the specified date; and that the specified date is the date of exercise or any earlier date not more than 180 days before it.
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