Angel Tax: Impact on Funding Startup in India

Angel tax is levied on unlisted companies who have to pay on the capital they raise through issue of shares.

Section 56(2)(viib) of the Income Tax Act, 1961, deals with the concept of “Angel Tax” where funds raised by the start-ups are taxed if they exceed the fair market value of the company.

Rate of Angel Tax

Angel tax is an income tax levied at a rate of 30.9%.

Applicability

Angel tax was applicable only to investments made by resident investors.

In the Finance Act 2023 extended this provision to include foreign investors.

DPIIT recognized start-ups are now excluded from paying this tax with certain conditions.

Why Angel Tax was introduced in India?

This tax was introduced through the Finance Act, 2012 to curb tax avoidance, money laundering and the circulation of black money under the guise of investment in start-ups.

Important Update

The Finance Minister while presenting union budget 2024-25 said that for all classes of investors proposed to abolish the angel tax.

Impact On Abolish Angel Tax

• Encourage start-up growth

• Address investor concerns

• Promote ease doing business

• Prevent unintended consequences

• Feedback from the start-up community

Exemptions Announced in 2019 for Start-ups

Capital Limit

The aggregate amount of paid-up share capital and share premium of start-up cannot be excess of Rs. 25 crores. This amount does not include money raised from Non Resident Indians, Venture Capital Firms and specified companies.

Angel Investors

For angel investors, the amount of investment when exceeds the fair market value will able to claim 100% tax exemption. The investors must have a net worth of Rs. 2 crores or income of above Rs. 25 lakh in the past three fiscal years.

Eligible Start-ups

Start-ups should be recognize by the Department for Promotion of Industry and Internal Trade as eligible start-ups.

How To Calculate?

Let us taken an example to know how to calculate in detailed.

Anant’s start-ups attracted an investment of Rs 40 crore. He issued 1 lakh shares to an Indian investor at Rs 4,000 per share. However, the fair market value of each share is only Rs 2,000 i.e., FMV of the shares totals Rs 20 crore.

Solution

As Anant’s start-up received Rs 40 crore where the fair market value was Rs 20 crore, the difference of Rs 20 crore is excess.

Under Section 56(2)(viib) of the Income Tax Act, Rs 20 crore is treated as income and is subject to “angel tax.”

The tax rate is 30.9% which means Anant’s start-ups would owe Rs 6.18 crore in tax on this excess amount.

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