Chartered Accountant · ICAI M.No. 153926 · FRN 136869W
What angel tax was, and why it hurt startups
Under Section 56(2)(viib), if a startup issued shares at a premium above their fair market value, the excess was treated as the company’s income and taxed. For example, raising at ₹100 a share when the assessed FMV was ₹40 meant ₹60 a share could be taxed — exactly the situation in growth rounds, where investors pay for future potential, not current book value. It led to drawn-out valuation disputes with the tax department.
Abolished from FY 2024-25 — what it means now
The Finance Act 2024 removed Section 56(2)(viib) for all investors, effective assessment year 2025-26. So for shares issued on or after 1 April 2024 there’s no angel tax, and no need to defend the premium against an FMV — including for foreign investors, who had been brought into its scope earlier. Confirm the position for your specific year.
Older rounds still need care
For shares issued up to FY 2023-24, angel tax can still be raised in assessment, so keep the records that support those rounds — your DPIIT recognition, the exemption declaration, and the valuation report. If an earlier round is questioned, those documents are your defence. See how the exemption worked for pre-abolition years.