| Type | Description | Contributor | Date |
|---|---|---|---|
 | Post created | Pocketful Team | Jun-23-25 |
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What is Angel Tax?
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Once a major problem related to startup funding, called angel tax, is now a thing of the past. In the July 2024 budget, the government decided to completely abolish this tax, which came into effect from April 1, 2025. Earlier this tax was levied when a startup raised funds by selling shares at a price higher than its value.
In this blog, we’re going to explore what the angel tax was, how it impacted startups, and why its complete abolition from April 1, 2025, marks a significant turning point for the Indian startup ecosystem.
What is Angel Tax?
Angel tax is a tax that was levied on unlisted companies (especially startups) when they sell their shares at a price higher than their Fair Market Value (FMV). The excess amount was considered “income from other sources” and was taxed at around 30.9%
Rate of Angel Tax
About 30.9% tax was levied on the amount received above the FMV. Apart from the base tax, it also included cess and surcharge.
Why was it called the “Angel” tax?
Because this tax specifically impacted investors called “angel investors”—people who invested in startups at an early stage.
When did it start?
This initiative was introduced by the Government of India in the 2012 Finance Budget (Finance Act 2012) and was implemented by April 2013
Is it still in effect?
No, its complete abolition was announced in the July 2024 budget, and has been implemented with effect from 1 April 2025.
Read Also: Types Of Taxes In India: Direct Tax And Indirect Tax
Why Was Angel Tax Introduced?
The reason behind the introduction of Angel Tax was:
- Introduction to curb black money : Angel tax was first introduced in 2012 with the aim of curbing the investment of black money in the name of startups. At that time, many companies used to issue shares at a premium much higher than their real value, which increased the possibility of tax evasion and money laundering.
- Legal aspects : To implement this tax, the government added section 56(2)(viib) to the Income Tax Act. This means that if a private company raises money by selling shares at a price higher than their actual value, then that extra amount will be considered as income and will be taxed. According to the government, this was necessary so that those who raise funds through illegal means could be controlled.
- Impact on startups : Although its purpose was to increase transparency tax revenues, many genuine startups and angel investors suffered from it. There were obstacles in funding and investors also started hesitating. This was the reason why the government decided to abolish it in 2024.
Read Also: Inheritance Tax: Past, Progression, And Controversy
Who Has to Pay Angel Tax? (Applicability Criteria)
The scope of angel tax was initially quite limited, but it affected all unlisted companies that raised funds by issuing shares at a price higher than their FMV. In most cases, these were startups that raised money from angel investors for initial investment.
If a startup was not recognized by DPIIT, and sold shares at a price higher than FMV, it would have to face this tax. However, recognized startups were exempted from this tax with certain conditions.
Calculation of Angel Tax with Example
Angel tax was calculated based on the difference between the Fair Market Value (FMV) of the shares and the price at which they were actually sold. If a startup sold shares whose FMV was supposed to be ₹100 at ₹150, the difference of ₹50 was considered as “additional income” and was taxed.
Example : Suppose a startup sold 1,000 shares at ₹150 per share while their FMV was ₹100.
- Total amount = ₹1,50,000
- Value as per FMV = ₹1,00,000
- Excess amount = ₹50,000 (taxable)
How was FMV determined?
As per Income Tax Rule 11UA, startups could determine FMV in two valid ways:
- NAV (Net Asset Value): The value was determined based on the company’s assets and liabilities.
- DCF (Discounted Cash Flow): The company’s estimated future cash flow was discounted to today’s value.
Safe Harbour Rule : Rule 11UA provided that if the premium is up to 10% more than the FMV, the difference will not be considered taxable. This helped avoid tax disputes on small valuation mistakes.
Read Also: What is Capital Gains Tax in India?
Impact of Angel Tax on Indian Startups
The impact of Angel Tax on Indian startups can be summarized in the following points below:
- Raising funding became difficult : When angel tax was implemented, many startups had trouble raising investment. Investors were afraid that if they invested above the Fair Market Value, they might receive a notice from the tax department.
- Investors’ hesitation : Angel investors had to bear the risk of tax at the initial stage. Due to this, many people started shying away from investing in new startups, due to which innovative ideas were not able to get the necessary funds.
- Some big examples : In 2015–16, the bank accounts of TravelKhana (Duronto Technologies) were frozen and an amount of ₹33 lakh was seized by the tax department. Similarly, a company named Babygogo lost an amount of about ₹72 lakh due to tax disputes. These incidents were an indication that Angel Tax not only stopped funding but also affected the day-to-day financial activities of startups.
Angel tax had inadvertently made the investment environment in India negative, thereby slowing down the startup ecosystem.
Read Also: Why Do We Pay Taxes to the Government?
Recent Updates on Angel Tax (As of 2025)
Angel Tax to be abolished in Budget 2024‑25 :
- On July 23, 2024, Finance Minister Nirmala Sitharaman announced in the Union Budget 2024‑25 that Angel Tax is being abolished for all investors.
- It has been fully implemented from April 1, 2025.
What is its effect?
- Now DPIIT recognized startups will not face any angel tax for neither domestic nor foreign investors.
- This relieved both startups and angel investors of tax hassles and legal uncertainty.
- The DPIIT secretary confirmed in January 2025 that the decision had led to a rise in “reverse flipping” startups now setting up headquarters in India rather than overseas.
Angel Tax is gone and this has strengthened India’s startup ecosystem and the investment environment has become even more positive after Budget 2025.
Read Also: Old Regime Vs New Tax Regime: Which Is Right For You?
Conclusion
The decision to abolish angel tax in 2025 has proved to be a big positive step for the Indian startup ecosystem. This has not only increased investor confidence but has also made it easier for companies working on new ideas to get funding. The tax uncertainty that startups have been facing for a long time has now been relieved. These changes taken by the government show that India is now more prepared to encourage innovation and startups here will find a strong, stable and reliable environment in the years to come.
Frequently Asked Questions (FAQs)
Is Angel Tax still applicable in India?
No, Angel Tax is not applicable on DPIIT recognized startups from 1st April 2025.
What was the rate of Angel Tax?
Any amount exceeding the FMV was taxed at approximately 30.9%.
Who was most affected by Angel Tax?
Angel investors and early startups faced the most problems due to this tax.
Why did the government remove Angel Tax in 2025?
The government took this decision to promote startups and improve the investment environment.
Disclaimer
The securities, funds, and strategies discussed in this blog are provided for informational purposes only. They do not represent endorsements or recommendations. Investors should conduct their own research and seek professional advice before making any investment decisions.
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