My startup raised money above book value — is the premium still taxable as angel tax?
No, not for issues on or after 1 April 2025. Section 56(2)(viib) taxed a closely held company on share consideration received in excess of the fair market value of the shares, but the statute now carries an express proviso that the clause does not apply on or after 1 April 2025, that is from AY 2025-26 onwards.
Section 56(2)(viib) was the provision everybody called angel tax. It applied to a company in which the public are not substantially interested — a closely held company — that issued shares to a person for consideration exceeding the face value. The excess of the consideration over the fair market value of the shares was charged to the issuing company as income from other sources. Note the oddity: the tax fell on the company receiving investment, not on the investor, and it taxed a capital receipt.
There were two long-standing exceptions built into the clause: consideration received from a venture capital undertaking through a venture capital company or venture capital fund, and consideration received from a class of persons notified by the Central Government.
Originally it only reached resident investors. The Finance Act 2023 extended it to consideration received from any person, resident or non-resident, with effect from AY 2024-25. The stated reason was inflated share premiums being used to route unaccounted money, but the practical effect was to bring ordinary foreign venture funding within a valuation dispute, and that triggered the rule changes that followed.
Fair market value was determined under Rule 11UA. Historically that meant the net asset value method or the discounted cash flow method, with a merchant banker's report for the DCF route. CBDT overhauled the rule by Notification 81/2023 with effect from 25 September 2023. For non-resident investors it added five methods on top — comparable company multiple, probability weighted expected return, option pricing, milestone analysis and replacement cost. Those five remained unavailable where the funds came from a resident. The amendment also created a valuation framework for compulsorily convertible preference shares, allowing the FMV of unquoted equity shares to be used for CCPS, introduced a 10% tolerance band on valuation for both resident and non-resident issues, and gave merchant banker reports a 90-day shelf life before the date of issue. A price-matching mechanism let the issue price to a notified entity or venture capital fund be treated as FMV for other investors within a 90-day window either side.
Alongside the rules, CBDT notified classes of excluded investors, and DPIIT-recognised startups meeting the prescribed conditions were exempted, with the relief applying from 1 April 2023 under Notification 30/2023. That exemption route had a long history — DPIIT recognition had been extended from seven to ten years post-incorporation and the turnover cap raised to Rs 100 crore in 2019.
Then the whole structure was withdrawn. The Finance (No.2) Act 2024, introduced on 23 July 2024, made section 56(2)(viib) inapplicable on or after 1 April 2025. The bare text on the department's own site now carries the words "Provided also that the provisions of this clause shall not apply on or after the 1st day of April, 2025", so the charge is gone from AY 2025-26.
Withdrawal does not close the file. Assessments and appeals for AY 2013-14 through AY 2024-25 are still live, and for those years the valuation methodology and the merchant banker's assumptions remain the battleground. It also does not remove section 68, which the department frequently runs in parallel on the same share application money, requiring the company to establish the identity, creditworthiness and genuineness of the investor. Losing angel tax does not win a section 68 case.
Angel tax was the single biggest tax friction in early-stage Indian fundraising, and its removal from AY 2025-26 changes how a priced round is documented. But every open assessment for earlier years still turns on Rule 11UA as it stood in that year, so founders and funds need to know which version of the rule applied when. And the parallel section 68 exposure on share application money is untouched by the withdrawal.
The Assessing Officer rejected my explanation for cash credits. Must he then prove where the money actually came from before taxing it?
I made unexplained investments after the close of my accounting year. Which year can the officer tax them in, and can he reopen an earlier year to do it?
A fixed deposit stands in the name of a partner's son and my firm used it as security for its overdraft. The Assessing Officer says the money is really the firm's concealed income. Who has to prove what?
The officer rejected my books, estimated my profits at a flat rate, and then also added an unexplained cash credit. Can he do both, and must he say what source the credit came from?
You have a document that says so. Does that settle it?
If the department doubts my shareholders, can it add the money to my income?
I gave the lenders' names, addresses and PAN and filed their confirmations, but I cannot produce them and the summonses came back unserved. Can the loans still be added under section 68?
You gave particulars, paid by cheque and got a confirmation. Has the burden shifted?
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