Startup Advisory
Angel Tax (Section 56(2)(viib)) Was Abolished in 2024 — What Founders Need to Know Now
Lekha Editorial Team
CA-reviewed · Published
Angel Tax caused more startup funding panic in India between 2012 and 2024 than any other regulatory provision. It is now gone: the Finance Act 2024 omitted Section 56(2)(viib) entirely with effect from 1 April 2025, for resident and non-resident investors alike. If you are raising today, this is not a risk you need to manage. If you raised earlier, it may still be — assessments for prior years remain open.
What Section 56(2)(viib) Did, and When It Ended
The provision treated the difference between the price at which a company issued shares and the 'fair market value' of those shares as income in the hands of the company, taxable at approximately 30%. It was introduced in 2012 ostensibly to tackle money laundering, but its practical effect was to make aggressive startup valuations taxable.
The Finance Act 2024 omitted the provision with effect from 1 April 2025, for all classes of investor. The Income-tax Act 2025 did not reintroduce an equivalent.
What this means: for any share issue on or after 1 April 2025, there is no Angel Tax liability and no Rule 11UA merchant banker certificate is needed for that purpose — whether or not the company is DPIIT-recognised. The abolition is not retrospective, so earlier years are unaffected by it.
Legacy Exposure: Rounds Closed Before 1 April 2025
This is now the part that matters. Assessments for earlier years remain open within the normal limitation periods, and startups that raised between 2012 and early 2025 without defensible FMV documentation have received notices years after closing those rounds.
If you have an older unprotected round, a valuation obtained now cannot retroactively establish fair market value as at the earlier date. What can be assembled is a contemporaneous evidence file: the allotment board resolutions, PAS-3 filing, bank statements showing receipt of funds, investor correspondence, the business plan and projections that existed at the time, and any DPIIT recognition certificate.
Where a Finance Act 2019 or 2023 exemption applied to your round, document that it was satisfied — for the 2019 exemption, DPIIT recognition and the ₹25 crore aggregate limit; after Finance Act 2023, additionally that the company had no accumulated losses at the time of the investment.
What Replaces It in Your Fundraise Checklist
Removing Angel Tax from the checklist does not empty it. Two requirements were always there and are now the operative ones.
A priced round issuing new shares to an investor is a preferential allotment under Section 62(1)(c) of the Companies Act with Rule 13(1), and requires a valuation report from an IBBI Registered Valuer in the Securities or Financial Assets class. This is a Companies Act obligation and a merchant banker certificate does not satisfy it. A rights issue offered to all existing shareholders strictly in proportion falls under Section 62(1)(a) and needs no such report.
If any investor is non-resident, FEMA pricing rules under the Non-Debt Instruments Rules require a certificate from a Chartered Accountant, a SEBI-registered Merchant Banker, or a practising Cost Accountant.
Rule 11UA itself remains in force for other purposes — ESOP perquisite valuation at exercise under Rule 3, recipient-side Section 56(2)(x), and transfers of unquoted shares under Section 50CA — each requiring a SEBI-registered Category I Merchant Banker.
Key takeaway
Angel Tax is gone for new rounds, and the planning it used to require has gone with it. Two things remain: older rounds can still be assessed, so unprotected pre-2025 raises are worth documenting proactively; and a priced round still needs an IBBI Registered Valuer report under Section 62(1)(c), a requirement Angel Tax discussion often overshadowed. Confirm which report your transaction actually needs before engaging a professional.
Frequently asked questions
Is Angel Tax still applicable to my funding round?
No, if the shares are issued on or after 1 April 2025. Section 56(2)(viib) was omitted by the Finance Act 2024 with effect from that date, for both resident and non-resident investors. What your round does need is a valuation report from an IBBI Registered Valuer under Section 62(1)(c) with Rule 13(1) of the Companies Act, and a FEMA pricing certificate if any investor is non-resident.
Can an existing company still get Angel Tax notices for old rounds?
Yes. The abolition is not retrospective. Assessments for years before FY 2025-26 remain open within the normal limitation periods, and startups that raised between 2012 and early 2025 without proper FMV documentation have received notices years after closing. If you have older unprotected rounds, prepare the evidence file proactively rather than waiting for a notice.
What should I do if I receive an Angel Tax notice for an earlier year?
Do not ignore it. Income tax notices have response deadlines, typically 15–30 days, and responding late results in ex-parte assessments that are harder to contest. Gather all documentation: DPIIT recognition certificate if held, any merchant banker valuation report, allotment board resolutions, PAS-3 filing, bank statements showing receipt of funds, and investor correspondence. The abolition does not dispose of the notice, but the underlying merits are argued in the ordinary way.
Does DPIIT recognition still matter now that Angel Tax is gone?
Yes, though for different reasons. Recognition no longer provides an Angel Tax exemption because there is no Angel Tax. It continues to provide a relaxation of the Section 79 loss carry-forward restriction — conditional on every shareholder who held voting power in the loss year still holding shares in the set-off year — plus 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.
What is Rule 11UA and does it still apply?
Rule 11UA of the Income Tax Rules prescribes the methodology for determining fair market value of unquoted shares. It no longer applies to Section 56(2)(viib), which has been abolished, but remains in force for ESOP perquisite valuation at exercise under Rule 3, recipient-side Section 56(2)(x), and Section 50CA transfers. For these, the FMV must be determined by a SEBI-registered Category I Merchant Banker using a DCF or NAV method.
Did Angel Tax apply to convertible notes and SAFEs?
Not at the point the instrument was signed — these are debt instruments and Section 56(2)(viib) applied to the 'issue of shares'. The exposure arose at conversion, when shares were actually allotted. For conversions on or after 1 April 2025 the question no longer arises, but a conversion is still a share allotment and carries the Companies Act requirements described above.