Angel Tax in India: What It Was and What Applies Now

Bala A
Investment strategy planning with charts and notes

For over a decade, “angel tax” was one of the biggest worries for Indian founders raising money from angel investors. Many articles online still describe it as a live problem, and some founders still ask whether they must value their shares in a certain way to avoid a tax bill. The law has changed. This guide explains what the angel tax was, what the government decided in 2024, and what founders should still check. It is general information and not tax advice, so please speak to a chartered accountant about your own case.

Quick facts

  • What it was: a tax under Section 56(2)(viib) of the Income-tax Act on money received for shares of a closely held company above fair market value
  • Current status: the Finance Bill memorandum says the clause does not apply from assessment year 2025-26
  • Announced: in the Union Budget 2024-25 (23 July 2024), for all classes of investors
  • Still relevant for: earlier assessment years, where old cases may still be examined
  • Last checked: 26 October 2026 against the Ministry of Finance press release and the Finance Bill 2024 memorandum, as summarised from indiabudget.gov.in and pib.gov.in

What Was Angel Tax?

The tax came from a clause in Section 56 of the Income-tax Act, 1961. The explanatory memorandum to the Finance Bill, 2024 says the clause (viib) of sub-section (2) of Section 56 was inserted by the Finance Act, 2012. In simple terms, if a closely held company issued shares to an investor at a price higher than the shares’ fair market value, the excess amount could be treated as income of the company and taxed.

Startups often issue shares at prices based on future potential, not current assets, so the tax authorities could dispute a price. This is why founders called it a tax on raising money.

In 2023, the Finance Act extended the same clause to cover money received from non-resident investors. Before that, it applied mainly to resident investors. The memorandum for the 2023 Finance Bill describes this change.

What Did the Government Decide in 2024?

The Finance Ministry’s press release of 23 July 2024 says that Finance Minister Nirmala Sitharaman proposed to abolish the angel tax for all classes of investors while presenting the Union Budget 2024-25. The stated aim was to support the startup ecosystem and encourage investment.

The Finance (No. 2) Bill, 2024 carried the change. The memorandum explaining the provisions says the government decided to sunset the provisions of clause (viib) of sub-section (2) of Section 56 and that, as a result, the clause “shall not apply from the assessment year 2025-26”. Assessment year 2025-26 relates to income earned in the financial year 2024-25.

Always confirm the enacted text on the Income Tax Department’s website or in the Finance (No. 2) Act, 2024, because a Bill is only the proposal. The Income Tax Department’s official site is incometax.gov.in.

What Does This Mean for a New Share Issue?

For a share issue now, a startup that raises money from an angel investor does not face this particular valuation-based tax under Section 56(2)(viib), as far as the Finance Bill memorandum describes. That removes a major worry. It does not remove the need for sensible pricing and good paperwork. Reasons:

  • Other laws still apply. For example, foreign exchange rules have their own pricing requirements for investment from outside India, and company law has its own rules for issuing shares.
  • Investors and auditors still expect a valuation. Many investors ask for a valuation report to justify their price.
  • Tax authorities can still examine genuine concerns, such as whether the money was really received from the claimed investor. Keep proof of the source and identity of every investor.

Because I cannot check your particular facts, confirm the position for your own transaction with a chartered accountant.

What About Earlier Years?

The memorandum applies the change from assessment year 2025-26. That means share issues in earlier years are not covered by the sunset in the same way. If your company raised money before the change, a notice or assessment for an earlier year can still reach you. Keep these ready:

  • Share allotment records and board resolutions
  • The valuation report used for the issue price
  • Bank statements showing receipt of funds
  • Investor identity and source-of-funds documents

If you already have a notice, do not ignore it. Reply by the due date, and speak to a qualified professional.

What About the Startup Exemption?

Before the change, DPIIT-recognised startups could apply for an exemption from this tax, subject to conditions. The Startup India recognition page still mentions an exemption under Section 56 but gives no details. Do not rely on old articles about exemption applications. For new share issues, check the current law.

Common Mistakes

  • Reading old articles. Many pages written before 2024 describe the tax as active.
  • Assuming it disappeared for every year. The change applies from assessment year 2025-26, so earlier years may still be examined.
  • Throwing away valuation records. Keep them for at least as long as your accountant advises.
  • Mixing up angel tax with capital gains or foreign exchange rules. Different rules apply to the investor, the company and cross-border investment.
  • Skipping professional review. Share issue rules are technical. A short review before closing a round is cheap compared with a dispute.

Frequently Asked Questions

Is angel tax abolished in India?

According to the Finance Bill, 2024 memorandum, the provision is sunset so that it does not apply from assessment year 2025-26. The Finance Ministry also stated that the tax was proposed to be abolished for all classes of investors. Confirm the final law on the official Income Tax Department website.

Do I still need a valuation report?

The abolition removes this specific tax issue. Investors, auditors and other laws can still require a valuation, so ask your accountant before you issue shares.

I got a notice for an earlier year. What now?

Reply within the time given, gather your valuation and bank records and speak to a chartered accountant or tax lawyer. Do not ignore it.

Where to Go Next

Funding in India works through several routes: see our guides to the Seed Fund Scheme, the Fund of Funds, and the full Startup India guides hub. Tax benefits for recognised startups are covered in the Section 80-IAC guide.

Last checked: 26 October 2026 against the Union Budget 2024-25 materials and the Finance Ministry press release. This is general information, not legal, tax or financial advice. Tax law changes often, so confirm the current position with the Income Tax Department or a chartered accountant.

Official Sources

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