Angel Tax refers to the tax levied on startups when they receive investment exceeding their Fair Market Value (FMV) from angel investors. This tax is specified under Section 56(2)(viib) of the Income Tax Act, 1961, and was introduced to prevent money laundering. If a startup receives funding that surpasses its FMV, the excess amount is taxed as “income from other sources” at a rate of 30.9%.
In a significant move to bolster the startup ecosystem, the Indian government has abolished the Angel Tax for all investor classes starting from FY 2024-25.
Abolishing the Angel Tax is also in line with the government & Startup India initiative.
Consider a scenario where a startup receives Rs 15 crore from an angel investor. If the FMV of the shares issued is Rs 10 crore, the excess Rs 5 crore is subject to a 30.9% tax, resulting in a tax liability of Rs 1.545 crore.
To address concerns from the startup community, the 2019 Union Budget introduced exemptions for startups registered under the Department for Promotion of Industry and Internal Trade (DPIIT).
Angel tax is levied at a rate of 30.9% on investments exceeding the startup’s FMV.
Suppose a startup receives Rs 50 crore by issuing 1 lakh shares at Rs 5000 each, with an FMV of Rs 2000 per share. The FMV of the shares is Rs 20 crore, leaving Rs 30 crore as excess. The angel tax on this excess would be Rs 9.27 crore (30.9% of Rs 30 crore).
Despite exemptions, the concept of Angel Tax has faced significant criticism for hampering startup growth. The abolition of Angel Tax from FY 2024-25 aims to foster innovation and entrepreneurship in India’s startup ecosystem.
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