What Is Angel Tax?

What Is Angel Tax?

Startups often raise money by issuing shares to investors even before they are listed on the stock market. At this stage, their valuation is usually driven more by expected future growth than by their current financial performance.

This is where angel tax comes into the picture. It refers to the tax charged on the extra amount a company receives when it issues shares at a price higher than their fair market value. This provision is laid out under Section 56(2)(viib) of the Income Tax Act, 1961.

The idea behind this tax is to prevent companies from overstating their valuations to bring unaccounted money into the business. If you do not know much about angel tax, read on till the end.

Angel Tax Rate In India

Angel tax of 30.9% is applied to the amount received by the startup over its fair market value. However, this tax has now been removed.

Example of Angel Tax

Suppose a startup receives an investment of ₹50 crore from angel investors. However, the fair market value of the shares issued totals ₹35 crore. This means the excess amount of ₹15 crore would attract an angel tax of 30.9%.

Angel Tax Exemption

• DPIIT-recognised startups are exempt from angel tax, subject to certain conditions.
  
• After the issue of shares, the startup’s maximum paid-up share capital, along with the share premium, must remain within ₹25 crore.
  
• The fair market value (FMV) of the startup is required to be determined by a merchant banker, under Rule 11UA(2)(b) of the Income Tax Act, 1961.
  
• Funds received from venture capital firms, NRIs, and certain specified companies are excluded from the calculation.
  
• The startup’s annual turnover must not have crossed ₹100 crore in any of the previous financial years.
  
• Angel investors can claim a 100% tax exemption when investing in eligible startups that have a higher fair market value. However, the investor’s average annual income must not exceed ₹25 lakh. Moreover, their net worth must be at least ₹2 crore during the preceding three financial years.
  
• From the date of incorporation, the business can avail itself of a tax holiday for three consecutive years. During this period, the startup is not required to pay taxes.
  

(Note: Angel tax has been abolished, so the question of exemption no longer arises.)

Is Angel Tax Abolished?

Angel tax in India has seen multiple changes over the years. From 1 April 2025, the tax has been removed entirely and does not apply from the financial year 2025–26 onwards.

Conclusion

Angel tax was originally meant to prevent unlisted companies from receiving investments at inflated valuations. Even though it no longer exists, understanding how it worked and the conditions for exemption can help make sense of past transactions and the development of startup policies in India.