Angel tax
What Angel tax means, how it works, a worked example, the mistakes we see and the questions founders ask.
DefinitionAngel tax was income tax under Section 56(2)(viib) on the premium a startup received above fair value when issuing shares; it was abolished for all investors from FY 2024-25.
From 2012 the department could treat share premium above a company's fair market value as income of the company and tax it at 30%. Because early-stage valuations rest on future potential, this hit angel-funded startups hardest, and DPIIT-recognised startups needed a specific exemption to escape it. The Finance Act 2024 removed Section 56(2)(viib) for all investors, resident and foreign, from FY 2024-25 onward. What it means for you today: a valuation above book value no longer triggers tax on the company. You still need a valuation report from a registered valuer for issuing shares under the Companies Act, and foreign investment must follow FEMA pricing rules. Any notice for share premium received before April 2024 still needs a reply on its own facts.
How Angel tax works
Section 56(2)(viib), inserted by the Finance Act 2012, treated the premium a closely held company received on shares above their fair market value as income from other sources, taxed at the company's rate. Fair value was computed under Rule 11UA by the net asset or discounted cash flow method, and assessing officers routinely rejected founders' projections, which produced the notices that gave the provision its name. From 2019 DPIIT-recognised startups could claim exemption by filing a declaration, and from April 2023 the rule also covered non-resident investors.
The Finance (No. 2) Act 2024 omitted the clause for shares issued on or after 1 April 2024, so no share premium received in FY 2024-25 or later is taxable under it, whoever the investor is. The Income-tax Act 2025 carries no equivalent. Notices for premium received up to 31 March 2024 remain live and are argued on the valuation evidence of that time.
Two valuation rules survive the abolition and still govern every priced round. Under the Companies Act, a preferential allotment under Section 62(1)(c) needs a valuation report from a registered valuer, and the issue price cannot be below it. Under FEMA, shares issued to a non-resident cannot be priced below the fair value certified by a SEBI-registered merchant banker or a practising accountant using an internationally accepted method. Both set a floor, not a ceiling, so a higher premium is now purely a commercial matter.
A Gurugram startup with a book value of ₹20 per share closes a seed round in May 2026 at ₹600 per share on a discounted cash flow valuation. Under the old clause the ₹580 premium would have invited a query on the projections; today the company records the ₹580 as securities premium, files PAS-3 within 15 days of allotment and, because one investor is a Singapore fund, keeps the merchant banker's FEMA pricing certificate and files FC-GPR within 30 days of the allotment. No income tax arises on the round.
Mistakes we see with Angel tax
- Assuming abolition removed the need for any valuation, then issuing shares to a foreign investor below fair value and breaching FEMA pricing rules.
- Issuing shares to a founder's relative at a discount while investors pay the round price, which taxes the discount in the recipient's hands under Section 56(2)(x).
- Ignoring an old notice for a 2022 or 2023 round because the law changed, when the assessment for those years still proceeds under the earlier rule.
Last updated 19 October 2026. Checked against the MCA, GST, Income-tax and Trade Marks rules in force for October 2026.
Where you will meet this term
- Start-up India RegistrationFor a Pvt Ltd, LLP or registered partnership under 10 years old that wants DPIIT recognition and a shot at the 80-IAC tax holiday.from ₹4,999
- CFO ServicesFunded startups and growing companies that need a finance head for a few hours a week: runway, board packs, budgets and fundraise support, without a full-time hire.from ₹24,999/month
- Financial Projections & Business PlanFounders who need a 3 or 5 year financial model with stated assumptions, for investors, a bank, a grant or their own planning.from ₹29,999
Questions founders ask about Angel tax
Is angel tax completely gone?
Yes, for shares issued on or after 1 April 2024. Section 56(2)(viib) no longer applies to any investor, resident or foreign, and the Income-tax Act 2025 does not revive it. Years before that remain assessable under the old rule.
Do I still need a valuation report to raise a round?
Yes. The Companies Act requires a registered valuer's report for a preferential allotment, and FEMA requires a pricing certificate for any non-resident investor. Investors also want one for their own records. What has gone is the tax exposure on the premium, not the paperwork.
What if my startup received a notice for a round before April 2024?
Reply on the merits: the valuation report, the method it used, the investors' independence and, for a DPIIT-recognised startup, the exemption declaration filed at the time. Courts and tribunals have repeatedly held that an officer cannot substitute hindsight for projections made in good faith.