Notification No. 11

Amendment of the Income-tax Rules under section 22 of the Income-tax Act, 1961

What this is

Notification No. 11 was published on 18 January 2008. Its subject is Amendment of the Income-tax Rules under section 22 of the Income-tax Act, 1961.

This amends the Income-tax Rules. What it changes is the Rules, not the Act — and a rule can never take away what the section gives.

What it does

In exercise of the powers under section 295 read with Explanation (i) to clause (ba) of sub-section (1) of section 115WC of the Income-tax Act, 1961 and section 22 of the General Clauses Act, 1897, the Central Board of Direct Taxes makes the Income-tax (Second Amendment) Rules, 2008. In Part VIIC of the Income-tax Rules, 1962, clause (f) of sub-rule (4) of rule 40C, which defined "equity share", is omitted. A new rule 40D is inserted, providing that for the purposes of clause (ba) of sub-section (1) of section 115WC the fair market value of a specified security, not being an equity share in a company, on the date the option vests with the employee shall be such value as determined by a merchant banker on the specified date. The Explanation to rule 40D borrows the meanings of "merchant banker" and "specified date" from clauses (b) and (e) of sub-rule (4) of rule 40C.

Why it was issued

The explanatory memorandum states that the Finance Act, 2007 made employers liable to fringe benefit tax on the value of ESOPs at vesting; rule 40C already prescribed valuation for equity shares, the definition of "equity share" was found unnecessary because the term is used in the charging section without definition, and a method was needed for specified securities that are not equity shares.

Who it reaches

employers liable to fringe benefit tax on employee stock option plans
employees to whom specified securities other than equity shares vest
merchant bankers engaged to value such securities
assessing officers examining fringe benefit tax returns

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.22	s.20
s.115WC	no counterpart recorded
s.295	s.533

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

NOTIFICATION NO. 11/2008, DATED 18-1-2008

In exercise of the powers conferred by section 295 read with Explanation (i) to clause (ba) of sub-section (1) of section 115WC of the Income-tax Act, 1961 (43 of 1961), read with section 22 of the General Clauses Act, 1897 (10 of 1897), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely :—

1. (1) These rules may be called the Income-tax (Second Amendment) Rules, 2008.
(2) They Shall come into force with effect from the 1st day of April, 2008.
2. In the Income-tax Rules, 1962, in Part VIIC, —
(i) in rule 40C, in sub-rule (4), clause (f) shall be omitted; and
(ii) after rule 40C, the following rule shall be inserted, namely :—

"40D. Valuation of specified security not being an equity share in the company. — For the purposes of clause (ba ) of sub-section (1) of section 115WC, the fair market value of any specified security, not being an equity share in a company, on the date on which the option vests with the employee, shall be such value as determined by a merchant banker on the specified date.
Explanation.— For the purposes of this rule, ‘merchant banker’ and ‘specified date’ shall have the meanings assigned to them in clause (b ) and clause (e) respectively of sub-rule (4) of rule 40C."

[F. No. 142/25/2007-TPL]

EXPLANATORY MEMORANDUM

The Finance Act, 2007 amended the provisions of the Income-tax Act to provide that employers will be liable to pay fringe benefit tax on the value of ESOPs granted to employees as and when the specified security or sweat equity share were allotted or transferred to the employees. The value of ESOPs for the purposes of levy of FBT shall be the fair market value of the specified security or sweat equity share on the date of vesting of the options as reduced by the amount actually paid, or recovered from, the employee.
Explanation (i ) to clause (ba) of sub-section (1) of section 115WC of the Income-tax Act defines "fair market value" to mean the value determined in accordance with the method as may be prescribed by the Board. Earlier, rule 40C was inserted in the Income-tax Rules which prescribed guidelines for valuation of specified security or sweat equity shares being an equity sahre in the company. The said rule 40C has been amended to omit the definition of "equity share" as the same was not necessary in view of the term having been used in the charging section of the Income-tax Act without a definition, thereby allowing it to take its natural meaning. Further, a new rule 40D has been inserted in the Income-tax Rules for the purposes of valuation of specified security not being an equity share in the company.
The amended rule 40C and the new rule 40D will take effect from the 1st April, 2008 and will, accordingly, apply in relation to the assessment year 2008-09 and subsequent years.

What it changes

The rule numbers are the 1962 Rules’ own, as the notification names them. The right-hand column is the department’s own mapping into the Income-tax Rules, 2026, which renumbered nearly everything.

Rule of the 1962 Rules	Now, in the 2026 Rules
Rule 40C	no counterpart recorded
Rule 40D	no counterpart recorded

From when

1 April 2008.

What to watch

The rules come into force with effect from 1 April 2008 and, per the memorandum, apply in relation to assessment year 2008-09 and subsequent years.
Valuation under rule 40D must be by a merchant banker as on the specified date, so a valuation on any other date does not answer the rule.
The definition of "equity share" in clause (f) of sub-rule (4) of rule 40C stands omitted, and the term takes its natural meaning.
Rule 40D covers only specified securities that are not equity shares; equity shares remain within rule 40C.

Where you meet it

In the fringe benefit tax return and its computation of the value of ESOPs, in the merchant banker's valuation report kept with the employer's records, and in an assessment testing the value adopted at vesting.

What it names

Rules it names. Rule 40C, 40D of the Income-tax Rules, 1962. The 1962 Rules were replaced by the Income-tax Rules, 2026, which renumbered nearly everything: a rule number quoted here almost never means the same rule today.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 6 — 6/2010 dated 20 09 2010 20 September 2010
Notification No. 264 — Amendment of the Income-tax Rules under section 2 of the Income-tax Act, 1961 23 October 2007
Circular No. 319 — Section 80P l Income of Co-operative Societies 11 January 1982
Circular No. 9 — Income from House Property 25 March 1969
Circular No. 9/2007 — Explanatory circular on Fringe Benefit Tax arising on allotment or transfer of specified securities or sweat equity shar 20 December 2007
Notification No. 54/2026 [F. No. 370142/15/2026-TPL] / G.S.R. 240(E) — Ministry of Finance 31 March 2026

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What a notification is. A notification is made under a power the Act itself gives, and within that power it is law — unlike a circular, which only binds the department. Its reach is the reach of the enabling provision and no wider, and the date it carries decides from when it works.

Source: the Income Tax Department’s own published text — its page for this instrument.