Angel Tax
The informal name for Section 56(2)(viib), which taxed startups on share premiums above fair market value. Fully abolished from 1 April 2024. FMV valuation reports are still needed.
Angel tax was the informal name for Section 56(2)(viib) of the Income Tax Act, which taxed an unlisted company when it issued shares at a price above fair market value — treating the excess premium as "income from other sources" in the company's hands. The Finance (No.2) Act, 2024 abolished the provision, effective 1 April 2024.
Who it applied to
- Indian closely-held (unlisted) companies issuing shares above fair market value
- The tax was levied on the startup — the issuing company — not on the investor
- DPIIT-recognised startups with total paid-up capital and securities premium not exceeding ₹25 crore had an exemption framework even before abolition
What changed in 2024
From 1 April 2024, there is no tax on share premiums for any class of investor — domestic or foreign, individual or institutional. Startups can raise at any valuation above FMV without a tax consequence on the capital received itself. The provision existed from 2012 to 2024 and generated a significant volume of assessment disputes during that period.
FMV valuation reports remain necessary for other tax purposes — they are not optional just because angel tax is gone.
What most founders miss
Abolition is not retroactive. Funding rounds closed before 1 April 2024 fall under the old law. Assessment notices issued for those earlier years remain valid and will be adjudicated under the provisions that applied at the time of the share issuance. Founders who raised pre-2024 rounds and have not resolved outstanding notices should not assume the abolition has cleared them.
FMV valuations are still required. Angel tax used Rule 11UA to determine FMV. That same Rule 11UA now governs ESOP perquisite computation and Section 50CA (below-FMV secondary sales). A startup that stops commissioning valuations after 2024 will create ESOP and secondary transaction exposure.
Angel tax ≠ capital gains tax. Angel tax was a levy on the startup for receiving money. Capital gains tax applies to the investor or founder when they sell shares. These are independent provisions; abolishing one does not affect the other.
See also
- DPIIT Recognition — recognised startups had a pre-existing angel tax exemption before abolition
- Angel tax exemption — full article
- Funding round dilution and tax calculator
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