Angel tax: what it was and why it no longer applies
Angel tax taxed share premium above fair value as income of unlisted companies. It was abolished for all investors from tax year 2024-25 (AY 2025-26).
Short answer
Angel tax was the popular name for section 56(2)(viib) of the Income-tax Act, 1961, which taxed an unlisted company on share premium above fair market value. The Finance (No. 2) Act, 2024 abolished it for all classes of investors from assessment year 2025-26, and the Income-tax Act, 2025 has no equivalent.
- Former provision
- Section 56(2)(viib), Income-tax Act 1961
- Abolished by
- Finance (No. 2) Act, 2024
- Effective
- Assessment year 2025-26 (financial year 2024-25) onwards
- Income-tax Act 2025
- No equivalent provision
How angel tax worked
When an unlisted company issued shares at a premium, any consideration above fair market value was taxed as income of the company at the applicable rate. Initially it applied only to resident investors, but the Finance Act, 2023 extended it to non-residents. DPIIT-recognised startups could claim an exemption subject to conditions, and valuation rules allowed several methods, but disputes over valuations were common.
After abolition
From financial year 2024-25, share premium received by unlisted companies is no longer taxed as income under this provision, whether the investor is resident or not. Proceedings for earlier years, however, can still arise, so companies that raised money before April 2024 should keep their valuation reports and exemption filings.
Valuation still matters for other purposes: the Companies Act requires a registered valuer for preferential allotments, FEMA pricing rules apply to foreign investors, and the income-tax rules on receipt of shares below fair value can affect the buyer in share transfers.
Why it matters for startups
Founders can now negotiate valuations with investors without fear of a tax demand on the premium. But do not drop valuation discipline altogether: keep a valuation report for each round to satisfy company law and FEMA, and respond carefully to any notice relating to pre-2024 fundraises.
Related services
Sources
Written by the Refogo Editorial Team from the official sources above and checked on 2026-10-31. Laws, rates and due dates change, and authorities often extend deadlines, so confirm your own case with a qualified professional. This is general information, not legal or tax advice. Read our editorial policy or report an error to support@refogo.com.
Common questions
Is angel tax still applicable in 2026?
No. It was abolished for all investors from assessment year 2025-26, and the Income-tax Act, 2025 does not contain it.
Can I still get a notice for angel tax?
Yes, for earlier years when the provision applied, if the case is within the time limits for assessment or reassessment.
Do I still need a valuation report when raising money?
Yes, for company law and FEMA purposes, even though angel tax no longer applies.