What is angel tax?
Angel tax is the income-tax charge on a closely held company when the consideration it receives for an issue of shares exceeds the fair market value of those shares. The charge sits in section 56(2)(viib) of the Income-tax Act, 1961. A proviso added in 2024 says the clause does not apply on or after 1 April 2025.
What does the clause charge?
The company, not the person who pays for the shares, is charged. The amount brought to tax is the excess of the consideration over the fair market value, under the head income from other sources. The clause applies to a company in which the public are not substantially interested. A listed company is outside it.
The Finance Act, 2023 widened the clause so that consideration from a non-resident could also fall inside it, from assessment year 2024-25. That widening did not move the tax onto the investor.
From when does the clause stop?
The Finance (No. 2) Act, 2024 inserted a further proviso: the provisions of the clause shall not apply on or after 1 April 2025. The notes on the Finance Bill said the amendment applies from assessment year 2025-26. The clause was not deleted from the Act. It remains, with that proviso.
An issue that is still inside the clause is not switched off by calling the company a startup. The older exemption had its own conditions.
What was the DPIIT exemption?
For an issue that the clause still covers, the Department for Promotion of Industry and Internal Trade exemption required three things together.
- The startup is recognised by DPIIT.
- The aggregate of paid-up share capital and share premium, after the proposed issue, does not exceed ₹25 crore.
- The startup files a declaration that, for seven years, it will not put the money into the assets the 19 February 2019 notification lists, including land or a building not used for the business, loans outside the ordinary course, capital in another entity, shares and securities, a motor vehicle costing more than ₹10 lakh that is not held for hiring, and jewellery that is not inventory.
Recognition alone is not the exemption. A false declaration can take the exemption away. A private limited company that is issuing shares still records the allotment under the Companies Act.
Who is taxed?
Only the company receiving the share consideration. Section 80-IAC, a deduction of profits for an eligible startup, is a different provision and does not cancel this clause. Fair market value, where the clause still applies, is worked out under the rules. This page does not set a valuation fee.
Frequently asked questions
Four questions cover the sunset date, who is taxed, DPIIT recognition, and section 80-IAC.
Does angel tax apply to a share issue now?
The proviso says section 56(2)(viib) does not apply on or after 1 April 2025. The notes to the Finance Bill said the change applies from assessment year 2025-26. An issue that is still inside the clause is examined under the clause.
Does the investor pay angel tax?
No. The charge is on the company that receives the consideration, as income from other sources. It is not a tax on the investor.
Is DPIIT recognition the same as the exemption?
No. Recognition was one condition. For an issue still inside the clause, the startup also had to stay within the paid-up capital and premium limit and file the declaration about prohibited investments.
Is section 80-IAC the same as angel tax?
No. Section 80-IAC is a deduction of profits for an eligible startup. Angel tax is the charge on a share premium above fair market value.
Sources
The charge is section 56(2)(viib). The sunset is the proviso added by the Finance (No. 2) Act, 2024.