Startup Advisory
Angel Tax Is Abolished — What Founders Raising in 2026 Actually Need
Lekha Editorial Team
CA-reviewed · Published
Angel Tax shaped how Indian founders structured funding rounds for over a decade. It is gone. What replaced it in the compliance checklist is a requirement that was always there and that Angel Tax discussion tended to overshadow.
What was abolished, and from when
Section 56(2)(viib) treated the premium on shares issued above fair market value as income of the issuing company, taxable at roughly 30%. The Finance Act 2024 omitted the provision entirely with effect from 1 April 2025, for every class of investor. The Income-tax Act 2025 did not reintroduce an equivalent.
The practical effect: for any share issue on or after 1 April 2025, there is no Angel Tax, and DPIIT recognition confers no exemption because none is needed.
The abolition is not retrospective. Assessment years before FY 2025-26 remain open within the normal limitation periods.
- Rounds closing now: no Angel Tax, no Rule 11UA certificate needed for that purpose
- Rounds closed before 1 April 2025: still assessable, and worth documenting proactively
- DPIIT recognition: still valuable, but not for this reason
What your priced round actually requires
Issuing new shares to an investor who is not an existing shareholder taking a proportionate share is a preferential allotment under Section 62(1)(c) of the Companies Act 2013, read with Rule 13(1) of the Companies (Share Capital and Debentures) Rules 2014. That requires a valuation report from an IBBI Registered Valuer in the Securities or Financial Assets asset class.
This is a Companies Act obligation. A merchant banker certificate does not satisfy it, and a Registered Valuer report does not satisfy Income-tax requirements where those apply. Commissioning the wrong one means the filing is rejected and the valuation is paid for twice.
A rights issue offered to all existing shareholders strictly in proportion falls under Section 62(1)(a) and requires no such report.
Where Rule 11UA still applies
Rule 11UA has not gone away. It continues to govern fair market value of unquoted shares for Income-tax purposes, each requiring a SEBI-registered Category I Merchant Banker:
ESOP perquisite valuation at exercise under Rule 3, which must be dated within 180 days of the exercise date and recurs at every exercise event. Recipient-side Section 56(2)(x), which taxes a person receiving shares below fair market value and remains in force. Section 50CA, on transfers of unquoted shares below fair market value.
Since the SEBI (Merchant Bankers) (Amendment) Regulations 2025, fresh valuation engagements are restricted to merchant bankers whose registration covers valuation-related activities.
Key takeaway
Angel Tax is gone for new rounds, and with it the main reason founders commissioned a Rule 11UA certificate. What remains is the Companies Act requirement that was always there. Confirm which report your transaction needs before engaging anyone — the wrong signatory means the filing is rejected.
Frequently asked questions
Do I still need a merchant banker valuation for my funding round?
Not for Angel Tax — the provision no longer exists. A priced round needs a valuation report from an IBBI Registered Valuer under Section 62(1)(c) with Rule 13(1), which is a different professional under a different statute. If any investor is non-resident, a FEMA pricing certificate is additionally required from a CA, Merchant Banker, or Cost Accountant.
I raised in 2023 without a valuation certificate. Am I exposed?
Possibly. The abolition applies to share issues on or after 1 April 2025 and is not retrospective, so earlier assessment years remain open within the normal limitation periods. A valuation obtained now cannot retroactively establish fair market value as at the earlier date, but a contemporaneous evidence file — board resolutions, PAS-3, bank statements, the projections that existed at the time — can be assembled and is worth preparing before a notice arrives.
Does DPIIT recognition still matter?
Yes, for different reasons. It provides a relaxation of the Section 79 loss carry-forward restriction, self-certification under several labour laws, IPR and Seed Fund benefits, and eligibility for the Section 80-IAC tax holiday. Recognition plus Inter-Ministerial Board certification also allows employees to defer ESOP perquisite tax.