Angel tax in India: abolished, and what still applies to your fundraise

Section 56(2)(viib) of the 1961 Act taxed a closely held company when it issued shares at a price above their fair market value. The excess premium was treated as the company’s income and taxed at the normal corporate rate, around 25 to 30 percent. It was meant to stop money laundering through inflated share premiums, but it hit genuine startups raising at forward-looking valuations that tax officers refused to accept.

It originally covered only resident investors. The Finance Act, 2023 extended it to non-resident investors from 1 April 2023, which caused a second round of disputes. DPIIT-recognised startups could claim an exemption, subject to conditions.

The Finance (No. 2) Act, 2024 confined section 56(2)(viib) to assessment year 2024-25 and earlier, removing it for all classes of investors from assessment year 2025-26.

• Past years are still open. Rounds raised in FY 2023-24 or earlier can still be examined in pending assessments or reopened within the time limits. Keep the valuation reports and DPIIT exemption papers from those rounds.
• Unexplained credits (old section 68). A tax officer can still ask a closely held company to prove the identity and creditworthiness of each investor and the genuineness of the investment, including the source of a resident investor’s money. Registered venture capital funds are exempt from the source-of-source requirement. Unexplained amounts are taxed at a punitive rate.
• The investor’s side (old section 56(2)(x)). An investor who buys shares below fair market value is taxed on the difference. This hits founders and friends taking cheap shares, not the company.
• FEMA pricing for foreign investors. Shares issued to a non-resident must be priced at or above fair value determined by a chartered accountant, SEBI-registered merchant banker or practising cost accountant using an internationally accepted method, and reported in Form FC-GPR within 30 days of allotment.
• Companies Act valuation. A preferential allotment or private placement needs a registered valuer’s report, a special resolution, Form PAS-4 offer letters and Form PAS-3 within the time limit.

1. Get a valuation report from a registered valuer (and, for foreign money, a FEMA-compliant one) dated close to the allotment.
2. Collect investor KYC, bank statements showing the transfer, and for individual residents, their source of funds, ITR acknowledgements and net worth.
3. Pass the board and shareholder resolutions, issue PAS-4, receive money only into a separate bank account, and allot within 60 days.
4. File PAS-3 with the ROC and, for non-residents, FC-GPR on the RBI FIRMS portal.
5. Update the register of members and issue share certificates or credit demat shares; private companies now need their shares in demat form unless exempt.

Startups also keep the other benefits of DPIIT recognition, including the section 80-IAC tax holiday where the Inter-Ministerial Board certifies them. See our Startup India benefits guide.

1. Check the year and the time limit. Reassessment notices must be issued within the statutory window, which depends on the amount involved. A notice outside it can be challenged on that ground alone.
2. Check whether you were exempt. DPIIT-recognised startups that filed the declaration and met the conditions were outside the provision. Find the recognition certificate and the declaration acknowledgement.
3. Defend the valuation, not just the number. The rules let the company choose the valuation method. Tax officers have tried to replace a discounted cash flow valuation with their own, and tribunals have repeatedly held that the method chosen by the company must be respected, though its assumptions can be examined.
4. Prove the investors separately. Even where the premium is accepted, the officer can still test identity, creditworthiness and genuineness of each investor. Have their KYC, bank statements and tax returns ready.
5. Reply in writing, on time, with documents. Most adverse orders in these cases follow missed deadlines or thin replies.

Our income tax notice reply service handles these, with a CA and a lawyer on every file.