Angel Tax (Section 56(2)(viib))
What is Angel Tax (Section 56(2)(viib))?
Angel Tax refers to the Indian income tax provision under Section 56(2)(viib) of the Income Tax Act, 1961, which taxes share premium received by an unlisted company in excess of its fair market value as “income from other sources.” Historically a significant concern for startups raising angel and seed rounds, the provision was substantially reformed over the years and was abolished in the Union Budget 2024-25 for all classes of investors effective from Assessment Year 2025-26.
Why It Matters
Although abolished in 2024, Angel Tax historically deterred early-stage investment in India by taxing legitimate startup fundraising. Understanding its history helps LPs and GPs appreciate the evolving regulatory landscape and the government’s commitment to fostering startup investment.
Key Takeaways
- 1
Taxed share premium exceeding fair market value as income, primarily impacting early-stage fundraising.
- 2
Abolished in the Union Budget 2024-25 for all investor classes effective from AY 2025-26.
- 3
Its removal signals India’s intent to create a more investor-friendly startup ecosystem.
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