Angel Tax in India (2025): Meaning, Exemptions, Rules & Latest Updates

Angel Tax is Back in the News

Angel Tax in India is a tax levied on startups when they raise capital by issuing shares at a price higher than their fair market value.

It was introduced in 2012 under Section 56(2)(viib) of the Income Tax Act to curb money laundering through inflated startup valuations.

The tax applies to the excess amount received from investors, treated as "income from other sources."

It’s controversial because it affects genuine startup funding, especially from angel investors, by taxing capital as income.

Startups argue it discourages innovation and early-stage investments, especially from domestic investors.

In 2025, resolving Angel Tax concerns remains crucial for building a robust startup ecosystem and attracting sustainable capital.

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Table of Contents

1. Angel Tax is Back in the News
2. Are all FDI flows into India subjected to angel tax review?
3. Is the Angel Tax really a risk for start-ups?
4. Real issue is on FMV and convertibles
5. There is also a positive side to angel tax

What is Angel Tax in India?

Angel Tax is a tax levied on startups when they receive funding at a valuation higher than the fair market value (FMV) of their shares. It is governed by Section 56(2)(viib) of the Income Tax Act. The excess amount received over FMV is treated as income and taxed accordingly. This tax mainly impacts startups raising capital from Indian investors (angels). However, recognized startups registered with DPIIT may be exempt from Angel Tax under certain conditions.

History & Evolution of Angel Tax in India

• Introduced in 2012, Angel Tax in India was brought under Section 56(2)(viib) of the Income Tax Act.
   
• Its primary purpose was to curb money laundering by taxing excessive share premiums received by closely held companies.
   
• Many startups strongly opposed the tax, arguing it discouraged early-stage investments and innovation.
   
• Over the years, major amendments were introduced, including exemptions for DPIIT-recognized startups and changes in FMV calculation methods (notably in 2019 and 2023).
   
• As of 2025, Angel Tax in India also applies to foreign investors, raising new concerns—making it a key topic for those preparing for what is angel tax UPSC examinations.
  
  
  Angel Tax in 2025: What's New?

Below are the points on what has changed regarding “what is angel tax”—especially in the context of “what is angel tax in India” and “what is angel tax UPSC”—as of 2025:

Abolished from FY 2025–26: The Union Budget 2024 (effective for FY 2025–26, starting April 1, 2025) officially scrapped Angel Tax, eliminating the burdensome levy on startups receiving funding above fair market value. 

Foreign Investor Coverage Added Earlier: Prior to abolition, the Budget 2023 had expanded Angel Tax to include foreign investors under Section 56(2)(viib). However, DPIIT‑recognized startups remained exempt, whether funding was domestic or foreign. 

Key 2025 Reform: Full Removal for All: The 2025 changes (technically part of Budget 2024) meant no more Angel Tax for any class of investor, domestic or foreign. 

Impact on DPIIT‑Registered Startups: DPIIT‑recognized startups now enjoy complete relief from Angel Tax. The abolition removes all tax-related compliance obstacles, regardless of investor origin. 

Simplified Compliance and Less Litigation: With the tax removed, startups benefit from reduced disputes, fewer valuation hassles, and less litigation, allowing more focus on growth and innovation. 

Restored Investment Confidence: Industry leaders have welcomed the move as a game‑changer, paving the way for easier capital flow and revitalized investor sentiment—making it a vital point for discussions on what is angel tax in India and for aspirants exploring what is angel tax UPSC in their curriculum.

Are all FDI flows into India subjected to angel tax review?

Broadly, there are 4 classes of start-up flows that will be exempt from angel tax provisions, even if it translates into FDI in India.

• Flows from venture capital funds are still kept out of the purview of angel tax. The Finance Bill has actually added to this list, any venture capital outfit that is domiciled in the International Financial Services Centre (IFSC), Gandhinagar, Gujarat.
   
• Some of the investors are explicitly excluded from angel tax. If the investor is a sovereign fund, multilateral institution, Category-I FPI, Endowment Fund, Pension Fund, and pooled investment vehicles with more than 50 investors; then angel tax does not apply.
   
• As discussed earlier, residents from any of the 21 identified jurisdictions like the US, UK, Australia, Japan, France, Germany, Austria, Canada, Israel, Italy, South Korea, Russia, New Zealand, and Scandinavia can invest in Indian start-ups without angel tax worries.
   
• In addition, the start-ups that have been classified by the government as eligible start-ups will also be exempted from the angel tax condition. However, these eligible start-ups with 7-year tax records are just about 2% of the start-up universe in India.

Even if the above conditions are not satisfied, the consideration will either have to be substantially higher than the fair market value (FMV) or the gap should be something that cannot be explained with rational data.

How is Angel Tax Calculated?

Angel Tax is calculated based on the excess amount received by a startup over the Fair Market Value (FMV) of its shares. This excess was treated as "income from other sources" and taxed under Section 56(2)(viib) of the Income Tax Act.

Angel Tax = (Investment Amount Received – Fair Market Value of Shares Issued) × Tax Rate
Investment Amount Received = Amount paid by investors to subscribe to the shares
FMV = Fair Market Value of shares (as per merchant banker or other prescribed methods like NAV or DCF)
Tax Rate = Applicable income tax rate (usually 30% + surcharge & cess).

Fine Print of the Finance Bill 2025

The Finance Bill 2025 brings notable changes to angel tax provisions. Investors from 21 countries, including the US, UK, Japan, and Germany, are exempt from angel tax. However, major FDI sources like Singapore, Mauritius, the Netherlands, and UAE are excluded.

CBDT cites concerns over transparency, compliance, and audit trails in these jurisdictions. Only investments that meet the fair market value (FMV) condition will avoid taxation. This move aims to ensure greater regulatory control over foreign investments. However, it could temporarily reduce FDI inflows into Indian startups from excluded countries.

Is the Angel Tax really a risk for start-ups?

Angel Tax in India remains under review, with the final rules open for public comments. However, concerns persist—especially since major FDI into Indian start-ups comes from countries like Singapore, Mauritius, UAE, and Ireland, which fall under the purview of Angel Tax in India. According to current rules, if a non-resident invests at a price above fair market value (FMV), the excess may be taxed as income for the start-up—raising red flags.

Start-ups are worried on two fronts: disruption to FDI momentum just as funding recovers after an 18-month slowdown, and the risk of regulatory overreach. India, now home to over 100 unicorns and the third-largest start-up ecosystem globally, must tread carefully. For those asking what is angel tax, what is angel tax in India, or preparing for what is angel tax UPSC, this issue remains central to India's evolving investment climate.

Real issue is on FMV and convertibles

Broadly, there are two grey areas for start-ups in the angel tax announcement. Firstly, on FMV calculation; there is a formula agreed upon, but discretion is inevitable. There are factors like preferential exit, anti-dilution deals and substantial control, which influence the premium to FMV. These will be very subjective areas. The second concern is convertibles. Start-ups often sell stakes to global investors via convertible debt or convertible preference shares. Even if the conversion ratio was agreed upon earlier and the conversion happens after March 2023, they would still be covered by angel tax provisions and grandfathering will not apply. In short, one can expect a spate of legal disputes in this area.

There is also a positive side to angel tax

One concern is that the angel tax may force Indian start-ups to shift domicile to more friendly nations like Singapore or UAE. However, there is a positive side to angel tax. Remember, sound and solid regulation has generally been conducive to the orderly growth of markets. Most advanced Western nations have refused to compromise on compliance. While India surely needs a robust start-up ecosystem; it cannot be at the cost of compliance. More than the idea of angel tax, it is the hounding that India needs to be cautious about.