Angel tax, as per Section 56 (2) (viib) of the Income Tax Act, refers to the tax imposed on privately held companies when their shares are issued at a rate higher than the fair market value. Startups that demonstrate exceptional growth often face this tax liability.
However, not all startups are eligible for angel tax exemption. To qualify for this exemption in India, a startup must be recognized by DPIIT (Department for Promotion of Industry and Internal Trade). Additionally, the aggregate amount of paid-up share capital and share premium of the startup after issuing or proposing shares should not exceed INR 25 crores, and the fair market valuation must be certified by a merchant valuer.
It’s important to note that while calculating the threshold of INR 25 crores, the amounts of paid-up share capital and share premium received from non-residents, venture capital companies, or venture capital funds will not be considered.
By meeting these criteria, recognized startups can avail themselves of angel tax exemption, enabling them to attract investments without the burden of excessive taxation.
