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Angel Tax Abolished: 2025 Act & Residual Issues | Virtual Auditor

Angel Tax Abolished: Residual Issues Under the Income-tax Act, 2025

Quick Answer

The angel tax under old Section 56(2)(viib) of the Income-tax Act, 1961 was abolished by the Finance (No. 2) Act, 2024 and has not been carried forward into the Income-tax Act, 2025 (Act 30 of 2025, assented 21 August 2025, commenced 1 April 2026). From tax year 2026-27 onwards, share premium received by a closely held company — whether from resident or non-resident investors — is no longer subject to any income tax charge on the excess over fair market value. Pending assessments for older tax years continue under the repealed 1961 Act, and Rule 11UA valuation remains essential for FEMA, ESOPs and secondary transfers.

Last Updated: 15 April 2026  |  Applicable From: Tax Year 2026-27 (1 April 2026 onwards)  |  Reference: Income-tax Act, 2025 (30 of 2025), as amended by Finance Act, 2026

The angel tax saga is one of the defining policy stories of the Indian startup decade. From its contentious introduction in 2012, through its expansion to non-resident investors in 2023, to its abolition by the Finance (No. 2) Act, 2024 and its deliberate non-inclusion in the Income-tax Act, 2025, the provision has come full circle. This guide is written for founders, CFOs, venture capital investors, merchant bankers and tax practitioners who need a definitive view of where angel tax stands under the new Act — what has ended, what has survived, what to do about legacy assessments, and what documentation still matters. Written by CA V. Viswanathan, FCA and IBBI Registered Valuer, the guide draws on current live representation work in CIT(A) and ITAT angel tax matters for tax years 2019-20 through 2023-24.

Definition — Angel Tax: “Angel tax” was the popular name for the charge under old Section 56(2)(viib) of the Income-tax Act, 1961, which taxed the excess of share premium received by a closely held company over the fair market value of those shares (determined under Rule 11UA) as “income from other sources” in the hands of the issuer company at the applicable corporate rate. Introduced by Finance Act, 2012 to curb money laundering through inflated share premium, it was abolished by Finance (No. 2) Act, 2024 with effect from 1 April 2025 and has not been carried into the Income-tax Act, 2025.

Featured Answer — Is angel tax part of the Income-tax Act, 2025?

No. When Parliament passed the Income-tax Act, 2025 (Act 30 of 2025), which received Presidential assent on 21 August 2025 and commenced on 1 April 2026, the drafting committee consciously omitted the old angel tax charging provision. The repealed Section 56(2)(viib) framework is not replicated anywhere in the 536 sections of the 2025 Act. Closely held companies issuing equity shares to any investor — resident individual, non-resident, PE fund, sovereign wealth fund or corporate strategic — can receive share premium without attracting an income tax charge on the excess over fair market value. However, Rule 11UA valuation is still mandatory for: FEMA pricing on non-resident subscriptions, ESOP perquisite valuation under the salaries head, old Section 56(2)(x) equivalent when a recipient gets shares below FMV, Companies Act Section 62 private placement compliance, and any pending scrutiny for earlier tax years still governed by the repealed 1961 Act.

Table of Contents

  1. The History of Angel Tax (2012–2024)
  2. The Abolition: Finance (No. 2) Act, 2024
  3. Non-Inclusion in the Income-tax Act, 2025
  4. Residual Issue 1: Pending Assessments for Legacy Years
  5. Residual Issue 2: The Sec 56(2)(x) Equivalent Survives
  6. Residual Issue 3: DPIIT Exemption and Legacy Defence
  7. Valuation Requirements That Still Apply
  8. Interaction with FEMA Pricing Guidelines
  9. Carve-Out for Unlisted and Closely Held Companies
  10. What Startups Should Do Now
  11. Expert Insight
  12. Key Takeaways
  13. Frequently Asked Questions

The History of Angel Tax (2012–2024)

Angel tax was introduced by the Finance Act, 2012 as a new clause (viib) in Section 56(2) of the Income-tax Act, 1961. The stated objective was to prevent the laundering of unaccounted money through inflated share premium in closely held companies. The provision taxed the excess of share premium received over the fair market value of shares as income from other sources in the hands of the issuer company. Fair market value was to be determined as per Rule 11UA of the Income-tax Rules, which offered two methods for unquoted equity: the Net Asset Value (NAV) book-value approach and the Discounted Cash Flow (DCF) method.

The first decade of angel tax was marked by intense controversy. Early-stage startups regularly raise equity at valuations that far exceed book value because investors price in future growth, not current assets. DCF projections, based on optimistic but bona fide assumptions, routinely clashed with Assessing Officers who preferred the conservative NAV method. Dozens of startups received substantial demand notices in the ₹2 crore to ₹50 crore range, triggering public outcry from the startup community.

Key milestones

  • 2012: Angel tax introduced by Finance Act, 2012 as old Section 56(2)(viib).
  • 2016: Government exempted specified eligible startups through CBDT notifications, requiring Inter-Ministerial Board certification.
  • 2019: DPIIT recognition simplified, and DPIIT Notification GSR 127(E) exempted DPIIT-recognised startups from angel tax subject to conditions, including aggregate paid-up capital and share premium not exceeding ₹25 crore.
  • 2023: Finance Act, 2023 extended the angel tax to non-resident investors with effect from 1 April 2023. Five additional valuation methods were notified for non-resident subscriptions to reduce friction.
  • 2024 (July): Finance (No. 2) Act, 2024 abolished the angel tax with effect from 1 April 2025 for shares issued on or after that date.
  • 2025-2026: Income-tax Act, 2025 enacted without any equivalent angel tax charging provision.

During this twelve-year journey, the department issued several CBDT circulars attempting to ease compliance. DPIIT-recognised startups were granted protective exemptions, and Merchant Banker valuations were clarified as acceptable. Yet the fundamental conflict — the subjectivity of valuation meeting the objectivity of a tax charge — was never resolved. The July 2024 abolition was the eventual acknowledgement that the provision had become counter-productive for India’s startup ambitions.

The Abolition: Finance (No. 2) Act, 2024

The Union Budget 2024-25, presented by the Finance Minister on 23 July 2024, proposed the deletion of clause (viib) from Section 56(2) of the repealed Income-tax Act, 1961. The rationale in the Memorandum to the Finance Bill was explicit: to “abolish the angel tax for all classes of investors” in order to “bolster the Indian start-up eco-system, boost the entrepreneurial spirit and support innovation.”

Section 29 of Finance (No. 2) Act, 2024 omitted clause (viib) with effect from 1 April 2025, which meant that shares issued on or after that date by closely held companies were outside the angel tax net. The abolition was prospective and unconditional — no sunset qualifications, no minimum investor thresholds, no sectoral carve-outs.

Non-Inclusion in the Income-tax Act, 2025

When Parliament enacted the Income-tax Act, 2025 (Act 30 of 2025), the drafting committee had a strategic choice: carry forward the abolition as an omission, or replicate the provision and keep it dormant. The committee chose the former. The 2025 Act runs to 536 sections across 23 chapters, and the “income from other sources” head in Chapter IV contains the Sec 56(2)(x) equivalent (recipient-side taxation of property below FMV) but no equivalent of the issuer-side Sec 56(2)(viib) charge. The absence is deliberate. This is not a “holiday” that might be reinstated — it is a permanent structural change in India’s direct tax code.

The reference framework is now:

  • For tax year 2026-27 and onwards: No angel tax. Share premium is freely receivable subject to corporate governance and FEMA rules.
  • For tax year 2025-26 (old AY 2026-27): Governed by the repealed 1961 Act as it stood after the Finance (No. 2) Act, 2024 abolition, so no angel tax either.
  • For tax year 2024-25 (old AY 2025-26) and earlier: Governed by the repealed 1961 Act, with angel tax applicable up to the 2023-24 previous year. Pending assessments continue under the repealed Act machinery as preserved by the transitional provisions in Chapter XXIII of the 2025 Act.

Residual Issue 1: Pending Assessments for Legacy Years

The abolition is prospective, not retrospective. Assessments under old Section 56(2)(viib) for previous years prior to 2024-25 remain valid and enforceable. If a startup received a notice under old Section 143(2) or Section 148 citing angel tax for the previous year 2020-21 or 2021-22, that notice continues to have legal force. The Income-tax Act, 2025 transitional provisions expressly preserve pending proceedings under the machinery of the repealed Act until completion.

Practitioners handling such legacy cases should note:

Open assessments: The Assessing Officer can continue to propose additions under old Section 56(2)(viib) for the relevant previous year. The defence rests on the merits — specifically, proving that the share premium was at or below FMV under Rule 11UA as it stood at the date of issuance. A contemporaneous valuation report from a SEBI-registered Merchant Banker or IBBI Registered Valuer is essential.

Demand orders and appeals: The demand stands. A statutory appeal must be filed before the CIT(A) within 30 days of service of the order. The abolition by Finance (No. 2) Act, 2024 is not a legal ground of appeal for prior-year demands, but it supports the policy argument that the provision was widely acknowledged as flawed.

Penalty exposure: Penalty under the equivalent of old Section 270A (for under-reporting or misreporting of income) can be defended on the basis that the valuation methodology is inherently subjective. If the taxpayer relied on a bona fide Rule 11UA valuation report from a qualified valuer, the penalty should not sustain — this has been consistently upheld by ITAT benches including Mumbai, Delhi and Bangalore.

Time limits: Reassessment notices under the 1961 Act framework for income escaping assessment have specified time limits (three years in ordinary cases, ten years for income above ₹50 lakh). Startups should retain all contemporaneous valuation evidence for at least ten years to be safe.

Residual Issue 2: The Sec 56(2)(x) Equivalent Survives

This is the critical distinction that many advisors overlook after the abolition announcement. The old Section 56(2)(viib) taxed the company that issued shares at a premium above FMV. The old Section 56(2)(x) taxed the recipient of property (including shares) received below FMV. These are opposite sides of the same transaction.

Only Section 56(2)(viib) was abolished. The recipient-side charge has been carried into the Income-tax Act, 2025 under the income from other sources head. The charge continues to apply as follows:

  • Share transfers below FMV: If Mr A transfers unquoted shares worth ₹500 per share (FMV under Rule 11UA) to Mr B for ₹200, the differential of ₹300 per share is taxable as income from other sources in Mr B’s hands.
  • Gifts of shares: Shares received without consideration in aggregate exceeding ₹50,000 in a tax year are taxable in the recipient’s hands unless received from a specified relative, on the occasion of marriage, or in a few other narrow exemptions.
  • Valuation requirement: Rule 11UA continues to govern FMV computation for the Sec 56(2)(x) equivalent. DCF and NAV methods remain applicable, and certifications from qualified valuers remain essential.

The practical implication: even though angel tax on share issuance is gone, every secondary share transfer, buy-back, cross-shareholder internal realignment, or family gift still requires a Rule 11UA valuation. Valuation demand has shifted, not reduced. See our detailed guide on Rule 11UA valuation for methodology and documentation.

Residual Issue 3: DPIIT Exemption and Legacy Defence

For legacy years still under scrutiny, the DPIIT exemption notifications remain important. Successive CBDT notifications, most recently Notification No. 29/2023, exempted DPIIT-recognised startups from old Section 56(2)(viib) subject to aggregate paid-up share capital and share premium not exceeding ₹25 crore (with certain exclusions for listed companies, venture capital funds and specified investors).

If a startup received DPIIT recognition before the relevant share issuance and met the conditions, the exemption notification protects those issuances. Ensure the following documentation is filed in the assessment records:

  • DPIIT recognition certificate in Form 2 issued by the Department for Promotion of Industry and Internal Trade.
  • Inter-Ministerial Board certificate where relevant.
  • Declaration in Form 2 filed with the Ministry of Corporate Affairs on the eligibility for the angel tax exemption.
  • A reconciliation showing the aggregate paid-up share capital and share premium remained within the ₹25 crore ceiling.
  • Evidence that the funds were deployed in permitted uses (not invested in land, or lent to associates, or used for specified non-permitted purposes).

Many Assessing Officers issued demands without adequately verifying DPIIT status — these are strong appellate grounds. For practical appeal procedure, see our guide on income tax appeals before the CIT(A).

Valuation Requirements That Still Apply

Rule 11UA of the Income-tax Rules has been retained under the Income-tax Act, 2025. The rule recognises two primary valuation methods for unquoted equity shares of a company:

Method Who Can Certify When Typically Used
Net Asset Value (NAV) Chartered Accountant Asset-heavy companies, holding companies, steady state businesses
Discounted Cash Flow (DCF) SEBI-registered Merchant Banker Growth-stage businesses, startups, companies with strong forward visibility
Five international methods (NR only) Merchant Banker Historical window 2023-24 for non-resident subscriptions — relevant for legacy assessments only

Even under the Income-tax Act, 2025, the following situations require a formal valuation report:

  • FEMA-compliant share issuances to non-residents (SEBI-registered Merchant Banker under FEMA 20(R)).
  • ESOP grant pricing and perquisite valuation at exercise (for salaries head computation).
  • Companies Act Section 62 private placement pricing.
  • Share transfers where the Sec 56(2)(x) equivalent could apply.
  • Buy-back pricing under the Companies Act.
  • Business valuation for M&A, corporate restructuring, or IBC proceedings.
  • Scrutiny defence for historical tax years still under assessment.

Interaction with FEMA Pricing Guidelines

FEMA pricing guidelines are a separate regulatory regime under the Foreign Exchange Management Act, 1999 and are entirely independent of the Income-tax Act. Even though angel tax is gone, FEMA 20(R) continues to require that:

  • Shares issued to a person resident outside India must be at a price not less than the fair value determined by a SEBI-registered Merchant Banker or a Chartered Accountant using an internationally accepted pricing methodology.
  • DCF is the commonly accepted method for unlisted equity under FEMA.
  • Transfer pricing regulations under the 2025 Act may also apply to cross-border related-party transactions.

A startup raising a down round from a foreign VC fund in tax year 2026-27 has no income tax worry about angel tax, but it still needs a FEMA-compliant valuation and must file Form FC-GPR with the RBI within 30 days of allotment. Read our guide on FEMA valuation for FDI share pricing for procedural details.

Carve-Out for Unlisted and Closely Held Companies

The old Section 56(2)(viib) only ever applied to closely held (non-listed) companies. Listed companies were outside its scope. Under the Income-tax Act, 2025, since the provision is gone entirely, the distinction is academic for the charging provision. However, the scope of the surviving recipient-side rules does distinguish between listed and unlisted shares because the Rule 11UA valuation mechanics differ (quoted shares use the stock exchange closing price).

What Startups Should Do Now

For new fundraising in tax year 2026-27 onwards: No angel tax concern. Obtain a Merchant Banker DCF valuation for FEMA compliance if any foreign investor is involved, file Form FC-GPR within 30 days, comply with Companies Act Section 62 private placement procedures, and document the board approval chain. Maintain a clean KYC and bank trail for every investor.

For pending notices or appeals: Do not ignore statutory notices. File appeals within the 30-day window. Engage a tax practitioner experienced in angel tax litigation. Ensure your contemporaneous valuation reports are robust. The abolition strengthens the policy narrative but does not directly erase legal exposure.

For secondary share transfers: Obtain fresh Rule 11UA valuation at the transfer date. Old issuance-date reports are not valid for later transfers. The Sec 56(2)(x) equivalent continues to operate and the recipient bears the tax risk.

For ESOP grants: Continue to obtain valuation at each grant date for perquisite computation under the salaries head. Read our ESOP valuation guide for the mechanics.

For due diligence at exit: Acquirers in M&A transactions will continue to ask for the full valuation history. Maintain an organised file: board resolutions, valuation reports, share allotment forms, FC-GPR filings, DPIIT recognition (if applicable), and angel tax exemption compliance for all historical issuances. This hygiene will pay off at exit.

Expert Insight

CA V. Viswanathan: Over the last four years, our firm has represented close to fifty startups in angel tax litigation at the CIT(A) and ITAT level for previous years between 2019-20 and 2023-24. The pattern is depressingly consistent. The Assessing Officer rejects the taxpayer’s DCF valuation report on three grounds: optimistic revenue projections, lack of comparable listed benchmarks, and deviation of actual performance from projections. The AO then substitutes a Net Asset Value number that is typically one-fifth to one-tenth of the DCF figure, and raises a demand on the differential. Our defence strategy stands on three legs. First, Rule 11UA gave the taxpayer the right to choose between NAV and DCF, and the AO cannot substitute the method without a statutory basis. Second, DCF projections are evaluated as at the date of issuance, not with the benefit of hindsight. Third, for DPIIT-recognised startups, the exemption notification is a complete answer. The abolition of angel tax under the Income-tax Act, 2025 is a welcome closure of a difficult chapter, but practitioners should not assume that legacy exposure has vanished. The transitional provisions expressly preserve ongoing proceedings, and we expect the legacy tail to run until roughly tax year 2030-31. My practical counsel to founders: never destroy the valuation file, never let the 30-day appeal window lapse, and always keep the DPIIT recognition certificate in the same folder as the board resolution.

Key Takeaways

  • Angel tax under old Sec 56(2)(viib) was abolished by Finance (No. 2) Act, 2024 with effect from 1 April 2025.
  • The Income-tax Act, 2025 (Act 30 of 2025, assented 21 August 2025, commenced 1 April 2026) has deliberately not carried the angel tax charge into the new regime.
  • From tax year 2026-27 onwards, closely held companies can receive share premium from residents and non-residents without any income tax charge on the excess over FMV.
  • The abolition is prospective — pending assessments for tax years up to 2023-24 continue under the repealed 1961 Act machinery.
  • The recipient-side charge (old Sec 56(2)(x)) has been carried into the 2025 Act and continues to tax recipients of shares below FMV.
  • Rule 11UA valuation remains mandatory for FEMA, ESOPs, Companies Act Section 62 private placements, secondary transfers and legacy defence.
  • DPIIT exemption notifications remain relevant as defence for historical assessments.
  • Section 68 equivalent (unexplained cash credits) still applies to share capital and premium, so KYC and bank trail documentation are essential.

Frequently Asked Questions

Is angel tax still applicable under the Income-tax Act, 2025?

No. The angel tax regime under old Section 56(2)(viib) of the 1961 Act was abolished by the Finance (No. 2) Act, 2024 and has not been carried forward into the Income-tax Act, 2025. From tax year 2026-27 onwards, share premium received by a closely held company — from any resident or non-resident investor — is no longer subject to any income tax charge on the excess over fair market value.

When exactly was angel tax abolished and what is the current status under the 2025 Act?

Angel tax was abolished prospectively by Finance (No. 2) Act, 2024, with effect from 1 April 2025. The Income-tax Act, 2025, which commenced on 1 April 2026 and governs tax year 2026-27 onwards, contains no equivalent charging provision. The drafting committee chose not to replicate old Section 56(2)(viib), making the abolition permanent rather than a temporary holiday.

Does the abolition apply to non-resident investors as well?

Yes. Before Finance (No. 2) Act, 2024, angel tax was extended to non-resident investors from 1 April 2023. That extension lasted barely 15 months before being dismantled. Under the Income-tax Act, 2025, there is no angel tax charge on share premium from residents or non-residents. FEMA pricing guidelines still apply separately for share issuances to non-residents.

What happens to pending assessments for old years under old Section 56(2)(viib)?

Pending proceedings continue under the repealed 1961 Act machinery. The transitional provisions in the Income-tax Act, 2025 preserve ongoing assessments, appeals and recoveries. Notices issued under old Section 143(2), 148 or 263 citing angel tax for tax years up to 2023-24 remain valid, and the taxpayer must defend on merits using Rule 11UA valuation evidence contemporaneous to the issuance date.

Do I still need a valuation report after angel tax abolition?

Yes. Valuation is still required for FEMA compliance on non-resident subscriptions, the Sec 56(2)(x) equivalent in the 2025 Act (recipient-side tax on shares below FMV), ESOP perquisite valuation under the salaries head, Companies Act Section 62 private placements, secondary share transfers and buy-backs, and scrutiny defence for historical tax years. The demand for valuation services has shifted, not reduced.

Was the old Section 56(2)(x) equivalent carried into the 2025 Act?

Yes. The concept of taxing shares and specified property received without consideration or for inadequate consideration is carried into the 2025 Act under the income from other sources chapter. This is distinct from the abolished angel tax. The old Sec 56(2)(viib) taxed the issuing company; the Sec 56(2)(x) equivalent taxes the recipient. Only the former was dropped.

What valuation methods does Rule 11UA allow under the 2025 Act regime?

Rule 11UA of the Income-tax Rules has been retained. It recognises two primary methods for unquoted equity shares: the Net Asset Value (NAV) book-value method and the Discounted Cash Flow (DCF) method. DCF requires certification by a SEBI-registered Merchant Banker. Five additional internationally accepted methods were added for non-resident investors during the brief 2023-24 window.

Does abolition of angel tax affect the startup tax holiday under old Section 80-IAC?

No, these are separate provisions. The startup tax holiday (three-year profit-linked deduction for DPIIT-recognised eligible startups) has been retained under Chapter VIII of the Income-tax Act, 2025 with an extended sunset. The abolition of angel tax removes a compliance and litigation risk at the fundraising stage, while the tax holiday continues to benefit eligible startups on the profit side.

Can I still be issued a notice for angel tax after the 2025 Act commences?

Yes, for historical tax years only. The income tax department can still issue reassessment notices for earlier previous years where angel tax allegedly applied, within the time limits preserved under the 1961 Act framework. For tax years 2023-24 and earlier, old Sec 56(2)(viib) was on the statute book and the AO can still pursue it. Retain valuation reports and documentation for at least ten years.

What are the FEMA implications of share premium now that angel tax is gone?

FEMA pricing guidelines under FEMA 20(R) continue to require that shares issued to persons resident outside India be priced at or above fair value determined by a SEBI-registered Merchant Banker or Chartered Accountant using an internationally accepted methodology. This is an exchange control requirement independent of the Income-tax Act. FEMA non-compliance attracts penalties under Section 13 of FEMA, 1999.

How should a startup document valuation for tax year 2026-27 fundraising?

Even without angel tax, good valuation hygiene is recommended. Obtain a DCF-based valuation report from a SEBI-registered Merchant Banker before the issuance, have financial projections reviewed and signed off by management, ensure the report is dated on or before the board resolution, keep the DPIIT recognition certificate on file if applicable, and document the investor negotiation trail. This satisfies FEMA, Companies Act and any future scrutiny.

Does the Section 68 equivalent still apply to share premium?

Yes. The equivalent of old Section 68 has been carried into the Income-tax Act, 2025. If a company cannot satisfactorily explain the identity, creditworthiness and genuineness of a share subscriber, the share capital and premium can still be taxed as unexplained credit in the company’s hands. This operates independently of the former angel tax. Proper KYC, bank trail and investor due diligence remain essential.

What is the practical strategy for a startup facing legacy angel tax litigation?

Engage an experienced tax practitioner early. The defence rests on four pillars: (1) demonstrate that the chosen valuation method (DCF or NAV) was appropriate under Rule 11UA, (2) show projected financials were reasonable at the valuation date and not judged with hindsight, (3) rely on DPIIT exemption notifications if applicable, and (4) cite favourable ITAT and High Court decisions on AO substitution of valuation method. Penalty defence can rely on bona fide valuer reliance.

Who should still get a valuation report every year under the 2025 Act?

Any private limited company or LLP planning equity fundraising, ESOP grants, buy-back, M&A, cross-border share transfers, FEMA filings, or internal share transfers should obtain an updated valuation annually. Use an IBBI Registered Valuer or SEBI-registered Merchant Banker depending on purpose. Even though angel tax is gone, these use-cases keep the valuation function very much alive.

Virtual Auditor — Chartered Accountants & IBBI Registered Valuers
Author: CA V. Viswanathan, FCA, ACS, CFE, IBBI/RV/03/2019/12333
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