TaxFinancial Glossary
Angel Tax
Definition
A tax levied under Section 56(2)(viib) of the Income Tax Act when a closely-held company (startup) issues shares at a premium above its fair market value. The excess premium is treated as income in the hands of the company and taxed at the applicable rate. This was introduced to curb money laundering through shell companies.
Why It Matters
Angel tax has been a persistent pain point for Indian startups raising angel or seed funding, as early-stage valuations are inherently subjective. DPIIT-recognized startups with paid-up capital below Rs 25 crore were granted exemptions, but navigating the process requires proper documentation of fair market value through a registered valuer or prescribed methodology.