For years, the cruellest tax a startup could face was a tax on raising money. Bring in capital at a valuation the tax officer disagreed with, and the “extra” was taxed as your income. That was angel tax — and it is now gone. Real relief. But founders are drawing the wrong lesson from it: “valuation no longer matters.” It still does, just for different reasons.
What angel tax actually was
Under the old Section 56(2)(viib), when an unlisted company issued shares at a price above the tax department’s view of fair market value, the excess premium was treated as the company’s income — and taxed at around 30%. A startup that raised at an ambitious valuation could be hit with a tax bill on money it had just raised to build the business. It was the most-hated provision in the startup world for a decade.
What changed
The Finance Act 2024 abolished angel tax for everyone — domestic and foreign investors alike — from 1 April 2025 (AY 2025-26). For new fundraises from that date:
- You can issue shares at any premium without an angel-tax charge;
- You no longer need a special DPIIT exemption or the old declaration form for angel-tax purposes;
- The fear of a 30% tax on a high-valuation round is simply gone.
The wrong lesson: “valuation doesn’t matter now”
This is where founders trip. Angel tax was only one of the reasons a valuation mattered. Several others survive untouched.
1. Section 68 — your investor’s source of funds
This is the new front line. Section 68 (unexplained cash credits) is a separate provision that did not go anywhere. Angel tax asked “is your valuation too high?” Section 68 asks a different, sharper question: “where did your investor’s money come from?” An officer can still question the genuineness and creditworthiness of an investor — even asking for the investor’s income-tax returns — and tax the money as unexplained income if you can’t show a clean source.
2. FEMA pricing — foreign money still needs a valuation
If any investor is a non-resident, FEMA’s pricing rules are unchanged: shares to a foreign investor must be issued at or above fair market value, certified by a merchant banker or chartered accountant. Angel tax leaving does nothing to relax this — for FDI, the valuation report is still mandatory.
3. The other reasons a valuation still exists
- Section 56(2)(x) (now Section 92(2)(m), Act 2025) — issuing or transferring shares below FMV still taxes the receiver.
- Stamp duty, transfer pricing and investor due diligence all rely on a defensible valuation.
4. Old rounds aren’t off the hook
The abolition is not retroactive. If you raised before 1 April 2025 at a premium the department disputes, an angel-tax notice can still come, and assessments can be reopened for several years. Pending notices must still be contested — don’t assume the abolition wiped your past rounds clean.
Gone vs still applies
| Gone (for raises from 1 Apr 2025) | Still applies |
|---|---|
| Angel tax on premium above FMV (56(2)(viib)) | Section 68 — investor source of funds |
| DPIIT exemption / form for angel tax | FEMA FMV pricing for foreign investors |
| 30% tax fear on a high-valuation round | 56(2)(x) on shares issued below FMV |
| Valuation for stamp duty, transfer pricing, due diligence | |
| Notices on pre-Apr-2025 rounds (not retroactive) |
The bottom line
Angel tax was a genuine drag on Indian fundraising, and removing it is a big, welcome change — especially alongside lower capital-gains and corporate-tax rates. Just don’t mistake “no angel tax” for “no valuation.” Raise confidently at the valuation you can justify, document your investors properly, and keep the valuation report on file. The tax that punished ambition is gone; the discipline that protects you is not.
Frequently asked questions
Is angel tax really abolished in India?
Yes. The Finance Act 2024 abolished angel tax (Section 56(2)(viib)) for all classes of investors, domestic and foreign, with effect from 1 April 2025 (AY 2025-26). For fundraises from that date, a startup can issue shares at any premium without an angel-tax charge, and no special DPIIT exemption is needed for angel-tax purposes.
Does valuation still matter after angel tax is gone?
Yes. Angel tax was only one reason valuation mattered. You still need a fair-market-value valuation for FEMA pricing on foreign investment, to avoid the recipient-side tax under Section 56(2)(x) on shares issued below FMV, and for stamp duty, transfer pricing and investor due diligence. Keep getting merchant-banker or CA valuations.
What is Section 68 and why does it still apply?
Section 68 deals with unexplained cash credits. Even with angel tax gone, the tax officer can still ask where your investor’s money came from and question its genuineness and the investor’s creditworthiness, sometimes asking for the investor’s tax returns. If you cannot show a clean source, the money can be taxed as unexplained income, so investor documentation matters more than ever.
Can old fundraises still face angel tax?
Yes. The abolition is not retroactive. Rounds raised before 1 April 2025 at a premium above FMV can still receive angel-tax notices, and assessments can be reopened for several years. Any pending notices must still be responded to and contested; the abolition does not erase past exposure.
Do foreign investors change anything?
Yes. With a non-resident investor, FEMA pricing rules require shares to be issued at or above fair market value, certified by a merchant banker or CA, regardless of angel tax. The cleanest price is exactly the FMV, which satisfies both the income-tax and FEMA requirements at once.
CA Vijay R Singh, FCA
Founder, Vijay R Singh & Co., Chartered Accountants · ICAI M.No. 153926 · FRN 136869W
Chartered Accountant for startups, NRIs and SMEs in Mumbai, in practice since 2013. More about CA Vijay →
Educational content, not tax advice — fundraising tax and FEMA rules are fact-specific and continue to evolve; keep valuation reports and investor documentation on file. Consult your advisor before any fundraise. Vijay R Singh & Co., Chartered Accountants · FRN 136869W · ICAI M.No. 153926 · Mumbai, in practice since 2013.
