If you are an entrepreneur, you’ve likely heard of “Angel Tax.” Under Section 56(2)(viib) of the Income Tax Act, an unlisted company or startup in India was required to pay tax on funds received from investors at a premium. However, to qualify for angel tax exemption, certain conditions had to be met.
As per Budget 2024, Angel Tax has been abolished from FY 2025-26.
In the sections below, we will explain what Angel Tax is, how exemptions worked, and other important details for startups and investors.
What is Angel Tax?
Startups often seek equity investment because they lack tangible assets to offer as collateral. When a startup is trying to grow, an angel investor can provide funds in exchange for shares.
Angel Tax is governed by Section 56(2)(viib) of the Income Tax Act, 1961, introduced through the Finance Act, 2012. It applies to unlisted companies (startups whose shares are not publicly traded) receiving funding from investors. If the issue price of shares exceeds their Fair Market Value (FMV), the excess amount is treated as “income from other sources” and is taxed.
In simpler terms, if an investor pays more than the FMV of a share, the extra amount was earlier considered taxable under angel tax.
However, as per the Union Budget 2024, Angel Tax has been abolished from FY 2025-26 to support the growth of India’s startup ecosystem.
Example of Angel Tax
Suppose your startup receives ₹15 crore from an angel investor in exchange for shares. If the Fair Market Value (FMV) of those shares is ₹10 crore, the extra ₹5 crore is treated as excess money and was previously taxable at 30.9%.
The main purpose of angel tax was to prevent money laundering. Many new businesses did not maintain proper accounts or accurately show their assets, which could lead to black money. To address this, the Income Tax Department taxed the excess amount received over the FMV of shares.
With the abolition of angel tax from FY 2025-26, startups no longer have to pay this tax, making it easier to attract investors.
Drawbacks of Angel Tax
Here are some key drawbacks of angel tax:
- It only applied to startups funded by resident Indian investors.
- Investments from venture capital firms or foreign investors were not eligible for exemption.
- Startups often had to pay a large portion of their investment as tax, reducing the funds available to grow their business.
Is Angel Tax Abolished?
Yes, Angel Tax has been abolished in India as per the Budget 2024. This change is effective from 1st April 2025, meaning it will no longer apply from FY 2025-26 onwards.
Significance of Abolishing Angel Tax in India
Here’s why removing angel tax is important:
- Aligning with global standards: Startups and investors can now follow policies similar to leading startup hubs worldwide, encouraging cross-border collaborations.
- Reducing legal issues: Startups no longer have to deal with lengthy tax disputes and can focus on growing their business and innovating.
- Encouraging foreign investment: With the tax removed, foreign investors can more easily invest in Indian startups.
- Improving startup valuations: Startups can now have fair market-based valuations instead of being limited by strict regulatory rules.
Angel Tax Exemption
The government has stated that startups registered under DPIIT (Department for Promotion of Industry and Internal Trade) are exempt from angel tax. To get this exemption, the startup must apply to the CBDT (Central Board of Direct Taxes) with the required documents and get approval.
Here are the main conditions for exemption:
- After issuing shares, the startup’s maximum paid-up capital and share premium should not exceed ₹25 crore.
- A merchant banker must evaluate the fair market value (FMV) of the startup, as per Rule 11 UA(2)(b) of the Income Tax Act.
- Investments from venture capital firms, NRIs, or certain other companies are not counted for angel tax purposes.
- The startup’s annual turnover should not exceed ₹100 crore in any previous fiscal year.
- Angel investors can get 100% tax exemption if their average income is ≤ ₹25 lakh and net worth ≥ ₹2 crore in the last 3 years.
- Startups can also enjoy a tax holiday for 3 consecutive years from the date of incorporation.
Important Update: From FY 2025-26, the Indian government has abolished angel tax for all investors. This move, announced by Finance Minister Nirmala Sitharaman, is aimed at boosting startups, encouraging entrepreneurship, and supporting innovation.
Angel Tax Rate in India
In India, angel tax was levied at 30.9% on any investment received by a startup that exceeded the fair market value (FMV) of its shares. Startups seeking funds from investors had to pay this tax to the Income Tax Department on the excess amount.
Final Word
Even with exemptions for some startups and investors, angel tax faced criticism for slowing down the growth of many new businesses. The abolition of angel tax from FY 2025-26 is considered a major reform, expected to make funding easier and boost the Indian startup ecosystem.
Frequently Asked Questions (FAQs) on Angel Tax
1. What are the conditions for angel tax exemption?
Startups registered under DPIIT were eligible for exemption. Key conditions included:
- Paid-up capital and share premium ≤ ₹25 crore
- Fair market value evaluated by a merchant banker
- Annual turnover ≤ ₹100 crore
- Certain limits on angel investor’s income and net worth
2. Is angel tax abolished for all categories of investors in India?
Yes, angel tax has been abolished for all types of investors from FY 2025-26.
3. When was the Angel Tax abolished?
The tax was abolished as per the Union Budget 2024, effective 1st April 2025 (FY 2025-26).
4. Why has the Angel Tax been abolished?
The abolition aims to boost the startup ecosystem, encourage entrepreneurship, and simplify funding by removing barriers for investors.
5. Is Angel Tax applicable for FY 2024-25?
Yes, angel tax is still applicable for FY 2024-25, and the exemption applies from FY 2025-26 onwards.
