Angel tax in India: what it was, and what still matters after abolition

How angel tax worked

The rule was added by the Finance Act, 2012 to stop unaccounted money being passed through companies as inflated share premiums. It applied to closely held companies, broadly those whose shares are not listed. If such a company issued shares for more than their fair market value, the excess was taxed in the company's hands as income.

It was aimed at money laundering, but it caught genuine startups too. Early-stage valuations rest on future plans rather than current profits, and tax officers often disputed the valuation reports behind them. Until 2023 only money from resident investors was covered; the Finance Act, 2023 extended the rule to non-resident investors from the 2023-24 financial year.

A worked example

Illustrative figures. A valuer puts a startup's shares at ₹100 each, and an angel investor pays ₹150 a share for 1,00,000 shares, ₹1.5 crore in total. Under the old rule, the ₹50 a share excess, ₹50 lakh in all, could be treated as the company's income unless an exemption applied. At an illustrative 25% tax rate, before surcharge and cess, that is a bill of ₹12.5 lakh on money the company had raised, not earned.

The exemption for DPIIT-recognised startups

Before abolition, the main relief was for startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT). Under a February 2019 notification, a recognised startup could claim exemption by filing a declaration in Form 2, if it met conditions including:

• Paid-up share capital plus share premium, after the issue, of no more than ₹25 crore. Money from non-residents and venture capital funds was left out of this count.
• Not investing in certain assets, such as land or buildings not used in the business, loans and advances outside a lending business, shares and securities, or jewellery, for seven years after the financial year of the issue.

Abolition: what changed and when

In the July 2024 Budget speech the Finance Minister announced that angel tax would be abolished for all classes of investors. The Finance (No. 2) Act, 2024 then added a proviso that the clause "shall not apply on or after the 1st day of April, 2025", and the Budget memorandum described the change as applying from assessment year 2025-26.

Advisers have read the cut-off differently for shares issued during 2024-25, because the memorandum refers to an assessment year and the proviso to a date; if a round in that year matters, ask a tax adviser. The change was not retrospective, so assessments and appeals for earlier years continue under the old rule.

What still matters after abolition

Abolition removed one tax, not the need for a defensible price. Founders still need:

• A valuation for foreign investors: under FEMA, shares issued to a non-resident cannot be priced below fair value, certified by a chartered accountant, a SEBI-registered merchant banker or a practising cost accountant.
• A valuation for preferential allotments: company law requires an unlisted company's preferential issue price to be backed by a registered valuer's report.
• Evidence of where money came from: tax officers can still question share capital under the separate rules on unexplained credits.
• Care with secondary sales: rules that tax buyers or sellers of unlisted shares at prices below fair market value are separate from angel tax and still apply.

What founders should do now

Keep a valuation report for every round, dated close to the allotment, and file the approvals, the return of allotment and, for foreign investors, Form FC-GPR on time. Keep papers from pre-2025 rounds in case an old assessment is reopened. Tax and foreign-exchange rules change with budgets and notifications, so check the current position on incometaxindia.gov.in and rbi.org.in, or with an adviser.