Valuation Services
Section 56(2)(viib) Angel Tax Was Abolished in 2024 — What Your Funding Round Actually Needs Now
Lekha Editorial Team
CA-reviewed · Published
Section 56(2)(viib) — the Angel Tax provision — was abolished by the Finance Act 2024 with effect from 1 April 2025, for all classes of investor. If you are raising now, this is no longer a risk you need to plan around. But two things still matter: rounds closed before that date can still be assessed, and a priced round has always carried a separate Companies Act requirement that Angel Tax discussion tended to overshadow.
What Changed, and From When
Section 56(2)(viib) taxed the premium where an unlisted company issued shares above their fair market value — the excess was treated as the company's income. The Finance Act 2024 omitted the provision entirely with effect from 1 April 2025, for resident and non-resident investors alike. The Income-tax Act 2025 did not reintroduce an equivalent.
What this means in practice: for any round closed on or after 1 April 2025, there is no Angel Tax liability, and no Rule 11UA merchant banker certificate is required for that purpose. This is true whether or not the company is DPIIT-recognised — recognition is no longer relevant to this question.
What has not changed: rounds closed in earlier assessment years remain open to assessment within the normal limitation periods. If you raised before FY 2025-26 without a valuation certificate, that exposure is still live and worth reviewing.
What Your Priced Round Actually Requires
The requirement that was always there, and is now the operative one: 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, 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 class.
This is a Companies Act obligation, not an Income-tax one. A merchant banker certificate does not satisfy it, and a Registered Valuer report does not satisfy Income-tax requirements where those apply. The two are not interchangeable, and the most expensive mistake founders make is commissioning one when the filing needed the other.
A rights issue offered to all existing shareholders strictly in proportion to their holdings falls under Section 62(1)(a) and does not require a Registered Valuer report.
Separately, 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.
Where Rule 11UA Still Applies
Rule 11UA has not gone away. It continues to govern fair market value of unquoted shares for several Income-tax purposes, each requiring a SEBI-registered Category I Merchant Banker:
ESOP perquisite valuation: when an employee exercises options in an unlisted company, the perquisite is computed against a merchant banker certificate of FMV under Rule 3, which must be valid within 180 days of the exercise date. This recurs at every exercise event.
Section 56(2)(x): the recipient-side provision, which taxes a person receiving shares for less than fair market value. This is distinct from the abolished issuer-side provision and remains in force.
Section 50CA: transfers of unquoted shares below fair market value, where FMV substitutes for actual consideration in computing capital gains.
One further development to note: SEBI's Merchant Bankers (Amendment) Regulations, 2025 restrict fresh valuation engagements to merchant bankers holding registration for valuation-related activities. Confirm your merchant banker's registration covers valuation work before engaging them.
Key takeaway
Angel Tax is gone, and with it the main reason founders commissioned a Rule 11UA merchant banker certificate for a funding round. What remains is the requirement that was always there: a priced round issuing new shares needs an IBBI Registered Valuer report under Section 62(1)(c). Rule 3 still governs ESOP perquisite valuation, and Rule 11UA governs share transfers, where a Category I Merchant Banker is required. Confirm which report your transaction actually needs before engaging a professional — the wrong signatory means the filing is rejected and the work is done twice.
Frequently asked questions
Do I still need a Rule 11UA merchant banker valuation for my funding round?
Not for Angel Tax purposes — Section 56(2)(viib) was abolished with effect from 1 April 2025. What you do need for a priced round is a valuation report from an IBBI Registered Valuer under Section 62(1)(c) with Rule 13(1) of the Companies Act, which is a different professional and a different statute. If any investor is non-resident, you additionally need a FEMA pricing certificate.
I raised a round in 2023 without a valuation certificate. Am I still exposed?
Possibly. The abolition applies to share issues on or after 1 April 2025 and is not retrospective. Assessment years before FY 2025-26 remain open within the normal limitation periods, so a round closed earlier without a defensible FMV position can still attract a demand. A valuation prepared now cannot retroactively establish FMV as at the earlier date, but a well-documented contemporaneous position can still be defended. This is worth a specific review rather than a general answer.
Does DPIIT recognition still matter for my funding round?
Not for Angel Tax, which no longer exists. Recognition retains substantial value for other reasons: carry-forward of losses under Section 79 despite a change in shareholding, 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.
Who can sign the valuation report my ROC filing needs?
For a preferential allotment under Section 62(1)(c), only an IBBI Registered Valuer registered in the Securities or Financial Assets class. A Chartered Accountant who is not an IBBI Registered Valuer cannot sign it, and neither can a SEBI-registered merchant banker. Conversely, a Registered Valuer cannot sign a Rule 11UA certificate for Income-tax purposes — that requires a Category I Merchant Banker. Check the purpose before engaging anyone.
What about convertible notes and SAFEs?
No shares are issued when the instrument is signed, so no allotment requirement arises at that point. The obligation crystallises at conversion, when shares are actually allotted — at which point a preferential allotment under Section 62(1)(c) requires a Registered Valuer report in the ordinary way. Plan for the valuation at conversion, not at the note.