Angel tax in India: what its abolition means for rounds now

For twelve years, raising money at a high valuation in India came with a tax risk. If a tax officer decided your shares were worth less than an investor paid, the difference could be taxed as your company's income.

That risk is gone for new rounds. Valuation work isn't. Here's what angel tax was, when it ended, and which rules still shape how you price a round. It's an explainer, not tax advice.

What was angel tax in India?

Angel tax was the common name for Section 56(2)(viib) of the Income-tax Act, 1961. When an unlisted company issued shares for more than their fair market value, the excess over that value was taxed as the company's income from other sources. Founders felt it most in early rounds priced on future potential.

The government's own memorandum to the Finance (No. 2) Bill, 2024 traces the clause to Finance Act 2012. It first applied to money from resident investors. A note by Singhania and Partners on Mondaq records that Finance Act 2023 extended it to non-resident investors too.

Business Standard put the tax on the excess at 30.9%. For a startup that had just raised a round, that could take a real share of the cash it was meant to spend on growth.

There were reliefs. The same Mondaq note describes a February 2019 notification that let DPIIT-recognised startups claim exemption if their paid-up capital and share premium stayed under ₹25 crore after the issue, among other conditions. Even so, the note says the regime was criticised as stringent and burdensome for early-stage startups.

When was angel tax abolished, and from what date?

The Finance Minister announced the abolition in the Union Budget speech of 23 July 2024, for all classes of investors. The Finance (No. 2) Act, 2024 then added a proviso so the clause does not apply on or after 1 April 2025, and the government's memorandum says it applies from assessment year 2025-26.

Paragraph 153 of the Budget speech proposed "to abolish the so-called angel tax for all classes of investors". Clause 23 of the Finance (No. 2) Bill, 2024 carried out that proposal.

The dates need care, because tax years have two names. Assessment year 2025-26 is the year in which income of financial year 2024-25 is assessed.

That's why many advisers read the change as covering shares issued from 1 April 2024, and a commentator quoted by Business Standard said the same. Confirm the position for any round in that window with your chartered accountant.

When	What happened
2012	Finance Act 2012 inserts Section 56(2)(viib) for resident investors
February 2019	Notification lets eligible DPIIT-recognised startups claim exemption
2023	Finance Act 2023 extends the clause to non-resident investors
23 July 2024	Budget speech proposes abolition for all classes of investors
1 April 2025	Proviso takes effect; clause applies no more from assessment year 2025-26
1 April 2026	Income-tax Act, 2025 replaces the 1961 Act, with no angel tax clause

Does angel tax apply to rounds raised now?

No. A round you raise today isn't taxed as income just because the price beats a fair market value. The 1961 Act clause is switched off, and the Income-tax Act, 2025, which replaced the 1961 Act from 1 April 2026, does not bring back an equivalent. Older years are a different matter.

That reading of the new law comes from a TaxGuru analysis of May 2026, which notes that the 2025 Act lists incomes taxed as income from other sources and none taxes a company for share premium above fair value.

Old cases don't vanish. The Mondaq note expects proceedings on rounds before the change to continue. If you have an open notice from an earlier year, treat it as live.

Angel tax ended. The need to defend your price did not.

What still applies when you price a round?

Four sets of rules still shape the price of a round: FEMA pricing for foreign investors, the tax on buyers who get shares below fair value, the rule on unexplained credits, and company law on share issues. Each one can still ask for a valuation report, so the paperwork hasn't gone away.

FEMA pricing for foreign investors

Under the RBI's Master Direction on Foreign Investment, shares an unlisted Indian company issues to a person resident outside India can't be priced below a fair value worked out by an internationally accepted method. A chartered accountant, a SEBI-registered merchant banker or a practising cost accountant must certify it.

That's a floor, not a ceiling. The TaxGuru analysis notes that FEMA sets no upper limit for inbound investment. The company must also report the issue on Form FC-GPR within thirty days.

Tax on the buyer

The rule that taxed a buyer who got shares cheap survives. Section 92(2)(m) of the 2025 Act, which TaxGuru describes as the successor to Section 56(2)(x), taxes a person who receives property, including shares, for less than fair market value by more than ₹50,000. An investor who pays less than fair value can still face tax.

Unexplained credits and company law

Section 68 of the 1961 Act, and its equivalent in the 2025 Act, still lets an assessing officer ask a company to prove who its investor is, that the investor could afford the money, and that the deal was genuine, says TaxGuru.

Company law adds its own step. Section 62 of the Companies Act, 2013 links certain share issues to a registered valuer's report. Your company secretary can tell you whether your round needs one.

What should founders and angels do now?

Keep pricing rounds on a method you can defend in writing, because FEMA, company law and buyer-side tax rules still ask for it. Get the valuation report your investor mix needs, keep proof of where each investor's money came from, and close any open notices from earlier years with professional help.

Our guide to valuation methods for early-stage startups covers how to build a price, and CCPS vs CCD covers the instruments most rounds use.

If an angel is investing through a fund, the rules differ again, as SEBI's angel fund regulations explain. And when you're deciding how much to give, how much equity to give angel investors walks through the dilution.

None of this is tax or legal advice. The rules here are summaries of official texts and named commentary, linked above. Before you close a round, ask a chartered accountant or tax lawyer to check your specific facts.

Questions

What was angel tax in India?

Angel tax was the common name for Section 56(2)(viib) of the Income-tax Act, 1961. When an unlisted company issued shares above their fair market value, the excess was taxed as the company's income from other sources. Finance Act 2012 introduced it, and Finance Act 2023 extended it to non-resident investors.

Is angel tax abolished in India?

Yes. The Finance Minister announced it in the Union Budget speech of 23 July 2024, and the Finance (No. 2) Act, 2024 added a proviso so the clause does not apply on or after 1 April 2025. The government's memorandum says it applies from assessment year 2025-26.

Do I still need a valuation report to raise money?

Often, yes. FEMA pricing rules say shares issued to a foreign investor by an unlisted company can't be priced below a fair value certified by a chartered accountant, SEBI-registered merchant banker or practising cost accountant. Company law can also require a registered valuer's report. Ask your advisers which applies.

What happens to old angel tax cases?

The abolition switched the clause off for later years. It did not wipe out assessments for earlier years, and commentators expect pending cases to continue. If your company has an open notice for a round before the change, treat it as live and work through it with a chartered accountant or tax lawyer.

Sources: Ministry of Finance, Budget 2024-2025 Speech of Nirmala Sitharaman, 23 Jul 2024 · Ministry of Finance, The Finance (No. 2) Bill, 2024, clause 23, Jul 2024 · Ministry of Finance, Memorandum Explaining the Provisions in the Finance (No. 2) Bill, 2024, Jul 2024 · Business Standard, Union Budget 2024-25: Govt abolishes angel tax on startup funding, 23 Jul 2024 · Singhania and Partners via Mondaq, The End Of Angel Tax And Its Implications, 2 Sep 2024 · TaxGuru, Share Premium Tax Above FMV: End of Section 56(2)(viib), Section 92(2)(m) Continues, 5 May 2026 · Reserve Bank of India, Master Direction: Foreign Investment in India (updated up to 15 Jun 2026) · Companies Act, 2013, section 62 (India Code)

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