Analysis of Draft Rule 12: Computation of Income Attributable to Assets in India

The landscape of international taxation and cross-border mergers and acquisitions is poised for procedural clarity with the introduction of the Draft Income-tax Rules, 2026. Among the critical provisions introduced is Rule 12, which specifically addresses the complex issue of indirect transfers. This rule provides the mathematical framework for determining how much income is taxable in India when a foreign share or interest is transferred, deriving its value substantially from assets located within India.

For an assessee involved in offshore transactions where the underlying value is tethered to Indian operations or property, understanding Rule 12 is paramount for compliance and tax liability estimation.

Under the provisions of the Income Tax Act 1961, income is deemed to accrue or arise in India if it stems from the transfer of a capital asset situated in India. This concept extends to shares or interests in foreign companies if those shares derive their value substantially from assets located in India. This is legally referred to as the "look-through" provision found in Section 9(2).

Draft Rule 12 serves as the operational machinery for this section. It prescribes the exact method to apportion the income generated from such offshore transfers to the Indian jurisdiction.

The Apportionment Mechanism: The Formula

The core of Draft Rule 12 is a specific formula designed to calculate the proportion of income taxable in India. The rule mandates that the income attributable to Indian assets must be determined with reference to a "specified date" using the following equation:

Formula: \((A \times B) \div C\)

Breakdown of Variables

To ensure accurate computation, the assessee must understand the specific definitions of the variables A, B, and C as outlined in the draft rules: