Chartered Accountant · ICAI M.No. 153926 · FRN 136869W
Notes vs shares
Angel tax (the former Section 56(2)(viib)) was triggered by the issue of shares above FMV — not by raising debt. A convertible note is debt when issued, so it didn’t attract angel tax at that point. The question only arose later, at conversion into equity, where the conversion price versus FMV mattered.
Now moot
Since the provision is abolished from AY 2025-26, the point is largely historical — for current rounds, neither the note nor its conversion attracts angel tax. What remains relevant is the FEMA pricing for foreign-investor notes and Section 56(2)(x) on the investor side. Confirm the position for conversions of older notes.
A worked example
Example: a DPIIT startup raised a ₹50 lakh convertible note in 2026 that converts at the next round — no angel tax on either the note or the conversion. Had this been pre-2025, the conversion terms versus FMV would have needed checking. Today the focus is on the valuation and FEMA/FC-GPR for foreign money. Our team can structure the note and conversion cleanly.