Angel Tax

Angel tax is the informal name for the income tax that was levied under Section 56(2)(viib) of the Income-tax Act, 1961 on the share premium an unlisted company received from an investor above the fair market value (FMV) of its shares. The excess consideration was treated as "income from other sources" in the company's hands and taxed at the applicable rate. It was introduced to curb the laundering of unaccounted money through inflated valuations, but in practice it often caught genuine start-ups that raised capital at high premiums.

How fair market value was measured

The taxable amount turned on FMV. Under Rule 11UA, the fair market value of unquoted equity shares was the higher of the Net Asset Value (NAV) method or a valuation report from a merchant banker (a Chartered Accountant could earlier certify the discounted cash flow value, an option withdrawn in 2018). Any consideration received above this FMV was brought to tax.

Start-up exemption

Start-ups recognised by the DPIIT that satisfied the CBDT/DPIIT notification conditions, on paid-up capital and premium ceilings, eligible investors and non-investment in specified assets, were exempt on filing a declaration in Form 2.

Current status: abolished

The Finance (No. 2) Act, 2024 abolished angel tax for all classes of investors, resident and non-resident alike. Section 56(2)(viib) does not apply to consideration for shares issued on or after 1 April 2024 (Assessment Year 2025-26 onward). For fresh fund-raises in FY 2026-27, no angel tax liability arises, though an Assessing Officer may still examine share premiums received in earlier years within the applicable limitation period.