Angel Tax Abolished: What Section 56(2)(viib) Removal Means for Startups
The Finance (No. 2) Act, 2024 abolished angel tax from AY 2025-26. What changed, what still applies to share issues, and what founders should still document.
Angel tax has been abolished for AY 2025-26 onwards, covering share consideration received in FY 2024-25 and later years. The Finance (No. 2) Act, 2024 switched off Sec. 56(2)(viib) Income-tax Act for all classes of investors. For FY 2025-26 / AY 2026-27, a startup does not pay this tax merely because its issue price exceeds fair market value. Earlier-year disputes, investor verification, company-law requirements and FEMA compliance can still matter.
What was angel tax, and why did it affect startups?
Angel tax taxed certain closely held companies on share consideration exceeding the shares’ fair market value, rather than on business profits.
Under Sec. 56(2)(viib) Income-tax Act, a company in which the public were not substantially interested could face tax when it received consideration for issuing shares above face value. The taxable amount was the consideration exceeding fair market value, or FMV, determined under the applicable provisions.
“Angel tax” was an informal label, not a separate tax confined to angel investors. The provision originally covered consideration from residents. The Finance Act, 2023 extended it to non-resident investors from AY 2024-25, corresponding to FY 2023-24, subject to applicable exclusions and exemptions.
Startups were particularly exposed because their valuations often reflected intellectual property, market opportunities and projected growth rather than existing assets or revenue. Disputes arose over valuation methods and forecasts, including discounted cash flow valuations under Rule 11UA Income-tax Rules. However, a valuation above net asset value did not automatically establish taxable income.
When was angel tax abolished, and which financial years benefit?
The abolition applies from AY 2025-26, so it covers FY 2024-25 receipts, not merely money received on or after 1 April 2025.
The Finance (No. 2) Act, 2024 made Sec. 56(2)(viib) Income-tax Act inapplicable on or after 1 April 2025. This is an assessment-year commencement date.
Consequently:
- FY 2023-24 / AY 2024-25 and earlier: The historical provision can still apply, subject to the relevant law, exemptions and limitation periods.
- FY 2024-25 / AY 2025-26 onwards: The provision no longer applies.
- FY 2025-26 / AY 2026-27: The same abolition continues, with the Income-tax Act, 1961 governing this year.
This distinction matters for funding received between April 2024 and March 2025. Those receipts are already covered by the abolition.
What changes before and after the abolition?
The change removes the company’s above-FMV share-issue tax exposure under this provision, but does not remove other funding obligations.
| Issue | Up to AY 2024-25 | AY 2025-26 onwards |
|---|---|---|
| Share consideration exceeding FMV | Potentially taxable under Sec. 56(2)(viib) Income-tax Act | Not taxable under this provision |
| Investor coverage | Residents initially; non-residents also covered from AY 2024-25, subject to exceptions | Abolition applies across investor classes |
| DPIIT-linked angel tax exemption | Relevant where conditions were satisfied | Unnecessary for this abolished levy |
| Valuation documentation | Important for defending the issue price | Still relevant under other applicable laws |
| Investor identity and funding evidence | Required where examined | Remains important |
| Earlier-year proceedings | Subject to applicable procedural rules | Not automatically cancelled |
The abolition is not a general exemption for unexplained money or a waiver of share-allotment procedures.
Which valuation and compliance rules still apply?
Companies must still examine company law, FEMA, investor-side taxation and unexplained-credit provisions before closing a funding round.
Companies Act requirements
Preferential issues under Sec. 62(1)(c) Companies Act, 2013 generally require a registered valuer’s report, read with Rule 13 Companies (Share Capital and Debentures) Rules, 2014.
The requirements depend on the transaction route. A rights issue should not automatically be treated as a preferential allotment.
Private placements must satisfy Sec. 42 Companies Act, 2013. Form PAS-3 is due within 15 days of allotment for private placements; the general return-of-allotment deadline is otherwise 30 days where applicable. MGT-14 filing obligations depend on the resolutions passed and available exemptions.
FEMA requirements
For an issue of equity instruments by an unlisted Indian company to a person resident outside India, applicable FEMA pricing rules generally prescribe a floor based on arm’s-length valuation using an internationally accepted methodology.
Certification requirements arise under Rule 21 Foreign Exchange Management (Non-debt Instruments) Rules, 2019. Companies should also check sectoral caps, entry routes, investor eligibility and applicable exceptions.
Form FC-GPR reporting is generally required within 30 days of issuing equity instruments for reportable foreign investment.
Investor-side taxation
Sec. 56(2)(x) Income-tax Act remains relevant where a person receives property, including shares, without consideration or for inadequate consideration, subject to statutory thresholds and exemptions.
Its application to an allotment depends on the transaction’s facts and legal treatment. Abolition of the company-side levy does not automatically settle the investor’s position.
Unexplained share capital
Sec. 68 Income-tax Act permits scrutiny of the nature and source of credits, including share capital and premium. Maintain evidence of investor identity, creditworthiness and transaction genuineness, plus source-of-funds explanations where required.
Income assessed under this provision can attract Sec. 115BBE Income-tax Act: 60% tax, 25% surcharge on that tax and 4% cess, producing an effective 78% charge before any applicable penalty.
How does the abolition work in a costed startup example?
A genuine October 2025 funding round has no company-side angel tax charge, even if its issue price substantially exceeds NAV-based value.
Assume a Bengaluru SaaS startup raises ₹3 crore at an issue price four times its NAV-based value. The corresponding NAV-based amount is ₹75 lakh, leaving a ₹2.25 crore difference.
For a historical counterfactual, assume ₹75 lakh was the legally accepted FMV, no exemption applied, and the company validly opted for Sec. 115BAA Income-tax Act.
| Calculation | Amount |
|---|---|
| Share consideration received | ₹3,00,00,000 |
| Assumed accepted FMV | ₹75,00,000 |
| Excess over assumed FMV | ₹2,25,00,000 |
| Hypothetical tax at 22% | ₹49,50,000 |
| Surcharge at 10% | ₹4,95,000 |
| Cess at 4% | ₹2,17,800 |
| Hypothetical total under the former provision | ₹56,62,800 |
| Angel tax on the October 2025 receipt | ₹0 |
This is illustrative, not an assertion that NAV was the mandatory valuation method. The ₹2.25 crore is an assumed excess over FMV, not necessarily the accounting share premium.
The startup still needs applicable valuation reports, approvals, allotment filings and investor banking evidence. Professional and filing costs are separate.
Can earlier angel tax notices and assessments continue?
Earlier-year proceedings can continue within statutory limits because the abolition does not retrospectively erase historical exposure.
For AY 2024-25 and earlier, review the notice, relevant receipt dates, investor category, valuation rules then in force and any available exemption.
Useful records include contemporaneous valuation reports, forecasts supporting the valuation, subscription agreements, bank statements, investor confirmations and applicable DPIIT exemption documentation. DPIIT recognition alone did not necessarily satisfy every historical exemption condition.
Do not ignore a notice because angel tax is abolished. Check jurisdiction, deadlines and substantive grounds separately.
Is DPIIT recognition still worthwhile?
DPIIT recognition remains useful because its potential benefits extend beyond the abolished angel tax provision.
Eligible startups may access the tax holiday under Sec. 80-IAC Income-tax Act, allowing qualifying profits to be deducted for three consecutive assessment years selected within the first ten years, subject to separate eligibility and certification requirements.
Other potential benefits include self-certification under specified labour laws, faster patent examination and government procurement relaxations, subject to scheme conditions.
See our guides on DPIIT recognition and the startup tax holiday.
How SP & SC helps
SP & SC Legal and Taxation Services, Bengaluru, assists with funding compliance and historical angel tax disputes.
We coordinate valuations, review allotment documentation, handle applicable PAS-3 and MGT-14 filings, support FEMA reporting and prepare responses to earlier-year notices. Explore tax consultation and our start a business services.
Fees are a fixed quote after reviewing the case, confirmed in writing before work starts. Contact SP & SC or message WhatsApp at +91 90356 74566 to share your documents.
Frequently asked questions
Is angel tax abolished in India?
Yes. Sec. 56(2)(viib) Income-tax Act does not apply from AY 2025-26 onwards, covering FY 2024-25 and subsequent years.
Does the abolition cover foreign investors?
Yes. It applies across investor classes, but foreign investment must still satisfy applicable FEMA requirements.
Do startups still need valuation reports?
Often yes, particularly for preferential allotments and foreign investment. Requirements depend on the transaction route and applicable law.
Can old angel tax notices still be issued?
Yes, for relevant earlier assessment years, subject to statutory conditions and limitation periods.
Can investors still be questioned?
Yes. Sec. 68 Income-tax Act scrutiny can require evidence of identity, creditworthiness, genuine banking transactions and the source of funds.
Written by
SP & SC Editorial
Editorial team at SP & SC Legal and Taxation Services — practising advocates, chartered accountants, and company secretaries publishing hands-on guidance from live client files.
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