Angel Tax Exemption shield your startup's share premium from angel tax.

Angel tax is the colloquial name for the tax levied under Section 56(2)(viib) of the Income Tax Act, 1961 on share premium received by an unlisted company from any investor where the issue price of the shares exceeds the fair market value (FMV) determined under Rule 11UA of the Income Tax Rules. The excess of the issue price over FMV is taxed in the hands of the issuing company as income from other sources at the maximum marginal rate. The provision was originally introduced in 2012 to curb money laundering through inflated share premium, but in practice it disproportionately affected early-stage startups raising equity at intrinsic-value premiums far above their book FMV.

To address this, the government has progressively carved out an exemption. Under the current framework, a DPIIT-recognised startup that meets the conditions notified under Section 56(2)(viib) is exempt from angel tax in respect of share premium received from resident investors, provided the aggregate paid-up capital and share premium of the startup does not exceed Rs 25 crore after the issue, the investor is not a non-resident or specified entity, and the startup has not invested in proscribed assets such as immovable property, transport vehicles, jewellery, or capital instruments of other entities. The exemption requires a specific application by the startup post DPIIT recognition.

Our angel tax practice supports DPIIT-recognised and recognition-pending startups through every step of the exemption process. We assess eligibility against Section 56(2)(viib) conditions, prepare the Rule 11UA valuation report through a registered valuer, draft and file the angel tax exemption application with the CBDT, support investor diligence around exemption status, and integrate the angel tax position with the overall startup tax and compliance planning.