Angel investor tax in India: gains, losses and buybacks

Angels think hard about valuation and very little about tax, until an exit arrives. By then the holding period, the share class and the paperwork have already decided much of what is owed.

Since 1 April 2026, the Income-tax Act, 2025 has replaced the 1961 Act. This explainer sets out what the new statute says for an Indian resident angel. It is not tax advice: rates exclude surcharge and cess, and a chartered accountant should check your own case.

How are gains on unlisted startup shares taxed?

Gains on unlisted startup shares are taxed as capital gains when you sell. Under section 2(101) of the Income-tax Act, 2025, shares held for more than 24 months are long-term, and section 197 taxes long-term gains at 12.5%. Shares held for 24 months or less give short-term gains, taxed at your slab rates.

The special short-term rate in section 196, 20%, applies only to listed equity sold with securities transaction tax paid, so it doesn't reach a private sale of startup shares. If your startup lists, the clock changes: listed securities turn long-term after 12 months, and section 198 taxes long-term gains above Rs 1.25 lakh at 12.5% where the conditions are met.

Your shares	Long-term after	Long-term rate	Short-term gains
Unlisted startup shares	More than 24 months	12.5% (section 197)	Slab rates
Listed shares, STT paid	More than 12 months	12.5% above Rs 1.25 lakh (section 198)	20% (section 196)

One useful detail for angels who hold compulsorily convertible preference shares: section 2(101) counts the time you held the preference shares when they convert into equity. Conversion itself is listed in section 70 among transactions not treated as a transfer.

How are losses on startup shares set off?

Losses on startup shares can be set off only against capital gains, never against salary, business or other income. Under section 108, a short-term loss can offset any capital gain, but a long-term loss can offset only long-term gains. Section 111 carries an unused loss forward for eight tax years.

Section 109(2) states the limit plainly: a loss under the head "Capital gains" can't be set off against income under any other head. For an angel with a portfolio, that makes the order of exits and write-offs a planning question.

A startup that shuts down is the hard case. Whether a loss arises, and when, depends on whether there is a transfer of the shares, such as a sale or the extinguishment of rights in them. Ask a chartered accountant before you assume a write-off gives you a usable loss, and how to report it so it can be carried forward.

Does angel tax still apply?

No. Angel tax was charged on the startup, not on the investor, under section 56(2)(viib) of the 1961 Act. The government's memorandum to the Finance (No. 2) Bill, 2024 says the clause does not apply from assessment year 2025-26, and the 2025 Act carries no equivalent for the company.

One rule still touches the investor. Under section 92(2)(m) of the 2025 Act, a person who receives shares for less than their fair market value, by more than Rs 50,000, is taxed on the gap. An angel buying in well below fair value can face it. The full history is in what the end of angel tax means for rounds.

Is there still a section 54GB-type relief for angels?

No. Section 54GB of the 1961 Act exempted gains on selling a house if the money was invested in the equity of an eligible start-up. The Finance Bill, 2021 memorandum extended it only to houses transferred by 31 March 2022, and sections 82 to 89 of the 2025 Act carry no counterpart.

The relief that now matters runs the other way. Section 86, the successor to the old section 54F, exempts long-term gains on any asset other than a house, startup shares included, if the net sale proceeds go into one residential house in India within the set time.

The house must be bought within one year before or two years after the sale, or built within three years, and the benefit counts at most Rs 10 crore. It is lost if you already own more than one other house, so check the conditions with your adviser before you rely on it.

For an angel, the tax on an exit is mostly decided at entry: the share class, the holding period and the paperwork.

How are buybacks taxed, and is tax deducted at source?

Since 1 April 2026, money an angel receives when a startup buys back its shares is taxed as capital gains, not as a dividend. The Finance Act, 2026 omitted the buyback clause from the definition of dividend and rewrote section 69 of the 2025 Act.

Buybacks between 1 October 2024 and 31 March 2026 were different. The government's 2024 memorandum treated the payment as a dividend taxed at the applicable rates, with the cost of the shares allowed as a capital loss to use against later gains.

The new section 69 adds a cost for larger holders. In an unlisted company, anyone holding more than 10% counts as a promoter and pays an additional tax: for a holder that is not a domestic company, 10% of short-term gains and 17.5% of long-term gains. An angel with a large early stake should check where they stand.

On tax deducted at source, the answer turns on who you are. For a non-resident seller, section 393(2) of the 2025 Act, in serial number 17 of its table, requires the payer to deduct tax at the rates in force on any sum chargeable to tax. For a resident, ask the company and your accountant how the payment will be reported.

What records should an angel keep?

Keep the papers that prove cost, date and class for every holding: the share subscription agreement, the allotment or transfer record, bank proof of payment, any conversion of preference shares, and the price on every exit. Without them, the holding period and the cost are hard to prove.

Exits come in several forms, each with its own paperwork, from a secondary sale to an acquisition. The five exit routes for Indian angels and how secondary sales of startup shares work cover what each one involves. Bring a chartered accountant in before the exit, not after.

Questions

How is an angel investor taxed in India?

On exit, as capital gains. Under the Income-tax Act, 2025, unlisted shares held more than 24 months give long-term gains taxed at 12.5% under section 197, plus any surcharge and cess. Shares held 24 months or less give short-term gains taxed at the investor's slab rates. A chartered accountant should check each case.

Can angel investors set off losses on failed startups?

A capital loss can be set off only against capital gains, never against salary or business income. Sections 108 and 111 let a long-term loss offset only long-term gains, while a short-term loss can offset any capital gain, and unused losses carry forward for eight tax years under section 111.

Is there still a section 54GB exemption for investing in startups?

No counterpart appears in the 2025 Act. Section 54GB of the 1961 Act gave relief on house-sale gains invested in an eligible start-up, but only for property transferred by 31 March 2022. Sections 82 to 89 of the 2025 Act carry the reinvestment reliefs, and none covers start-up shares.

How is a startup share buyback taxed for an angel investor?

From 1 April 2026, buyback money is capital gains under section 69 of the Income-tax Act, 2025, as amended by the Finance Act, 2026. An angel holding more than 10% of an unlisted company counts as a promoter and pays an additional tax of 10% or 17.5% of the gain.

Sources: Ministry of Law and Justice, The Income-tax Act, 2025, Gazette of India, 21 Aug 2025 · Ministry of Law and Justice, The Finance Act, 2026 (4 of 2026), Gazette of India, 30 Mar 2026 · Ministry of Finance, Memorandum Explaining the Provisions in the Finance Bill, 2026, 1 Feb 2026 · Ministry of Finance, Memorandum Explaining the Provisions in the Finance (No. 2) Bill, 2024, Jul 2024 · Ministry of Finance, Memorandum Explaining the Provisions in the Finance Bill, 2021, 1 Feb 2021

For more on how startup funding works in India, read the MyStartupValley blog or visit mystartupvalley.com.