Budget 2024 abolished angel tax under Section 56(2)(viib) with effect from April 1, 2025. This landmark move removes one of the biggest compliance and valuation headaches for early-stage start-ups raising funds from domestic investors.
What Was Angel Tax?
Angel tax was a provision under Section 56(2)(viib) of the Income Tax Act that taxed the premium received by unlisted companies when issuing shares at a price higher than fair market value. For start-ups raising angel rounds, this created a bizarre situation — investors paying a premium (reflecting growth potential) triggered a tax demand on the investee company.
Why Was It a Problem?
Start-up valuations are inherently subjective and forward-looking. Rule 11UA provided two methods (DCF and NAV) to determine FMV, but neither adequately captured start-up economics. DPIIT-registered start-ups got partial relief, but non-registered ones and companies raising from non-resident investors continued to face scrutiny.
What Budget 2024 Changed
Finance Minister Nirmala Sitharaman announced the complete abolition of Section 56(2)(viib) effective April 1, 2025. This means any share premium received from any investor — resident or non-resident — will no longer be treated as 'income from other sources' and taxed. This is a full, unconditional removal.
Impact on Start-up Ecosystem
Angel investors and family offices can now invest in start-ups without worrying about valuation benchmarks. Seed and pre-Series A rounds will become simpler to close. Companies that received angel tax notices can breathe easier — though pending assessments will still need to be resolved for past years.
ESOP and Valuation Still Matter
While angel tax is gone, start-ups still need to comply with FEMA valuations for foreign investment (FDI), maintain proper documentation for convertible instruments, and manage ESOP taxation at exercise stage. A good tax advisor remains essential.
Action Points for Founders
Ensure your cap table and shareholder agreements are updated. If you have pending angel tax assessments, engage a tax advisor to resolve them. For new fundraising rounds, while angel tax is no longer a concern, proper documentation and board approvals remain essential for compliance.
Need Expert Advice on This Topic?
Our senior CA professionals are available for confidential consultations. We respond within one business day.
Our Start-up Advisory practice at Shahi & Co. assists businesses across New Delhi and Pan-India.