Angel tax: what it was and why it went away

Angel tax was the popular name for a rule in Section 56(2)(viib) of the Income-tax Act. It was added in 2012 to catch black money that was passed through private companies as share capital. If an unlisted company issued shares to a resident investor at a price above fair market value, the extra amount was taxed in the company's hands as income from other sources.

Here is a simple picture. A company's shares are worth ₹100 each by the tax department's method. An investor pays ₹250 each. The extra ₹150 per share could be taxed as income of the company, at the usual corporate rate, even though the company had not earned a rupee of profit. It was called angel tax because angel investors, the early individual backers of startups, were the usual buyers at such prices.

Startup valuations are not based on assets or profits. An early company with no revenue may be valued at ₹20 crore because investors believe it will grow. The tax department used formulas, such as discounted cash flow or net asset value, and those formulas often gave a much lower figure. The gap could become a tax demand.

The result was uncertainty and notices. Between 2018 and 2023 many startups reported tax notices after raising money from angel investors, and the dispute landed in tribunals and courts. The fear of a notice made founders and investors cautious in the early rounds, when funding is hardest to find. The tax was also a burden because a young company had no profit from which to pay a demand.

The government softened the rule several times. Startups recognised by DPIIT could apply for an exemption if they met conditions on the size of the raise and the investor. Some categories of investors, such as venture capital funds, were already outside the rule. In 2023, the rule was widened to cover non-resident investors too, with a list of countries and a set of valuation methods, which brought a fresh round of complaints from investors abroad.

The patchwork of exemptions meant that a founder needed a lawyer and a valuation report for each raise. That cost was a pain for small deals.

In the Union Budget of July 2024, the Finance Minister announced that angel tax would be abolished for all classes of investors. The Finance (No. 2) Act 2024 carried this through. As of October 2026, the position is that the tax does not apply from assessment year 2025-26, which covers money raised from 1 April 2024 onward.

Two details matter. First, the change is not backward looking in the sense of cancelling old tax assessments by itself. Cases for earlier years can still be in progress, depending on the facts. A company with a pending notice for a raise before April 2024 should ask its tax adviser about its status. Second, the removal covers the whole of Section 56(2)(viib), so it applies to all unlisted companies and not only to recognised startups.

The immediate gain is simplicity. A company can issue shares at a price agreed with the investor without worrying that the excess will be treated as income. The need for a tax valuation certificate to defend the price in the angel tax context has gone. Papers for DPIIT recognition no longer need a section on angel tax exemptions, and the 2026 revised startup framework drops those references, according to law-firm summaries.

Founders should not conclude that valuation no longer matters. Foreign investors still face the RBI pricing rules under the foreign exchange laws, which set a floor for the price at which shares can be issued to non-residents. The guide on FDI rules for startups covers that. Company law also needs valuations in some cases, such as when shares are issued on a preferential basis. And investors do their own valuation work, as the guide on how startup valuation works explains.

Yes, but a different one. The abolition removes the rule on shares issued above fair value. Other parts of the tax law about unexplained money still exist. If a company receives money and cannot say who gave it and why, tax officers can still ask questions. Keep a clean record: the share subscription agreement, bank transfer proof, the investor's identity and the board resolution. Honest, documented raises should not face trouble.

Treat any guide, including this one, as general information. Tax rules change with every Budget, and this is not tax advice. Check with a chartered accountant or tax lawyer before you raise money or answer a notice.