Section 56(2)(viib) of the Income Tax Act 1961, popularly known as the angel tax, taxed the excess of share premium received by a closely held company over the fair market value of the shares as income from other sources. The provision was widely criticised for treating genuine capital investment as taxable income and creating uncertainty for startups raising funds at early-stage valuations.
The Finance (No. 2) Act 2024 abolished Section 56(2)(viib) with effect from assessment year 2025-26 (financial year 2024-25 onwards). This means that share premium received by a company from any investor — resident or non-resident — from 1 April 2024 onwards is not subject to angel tax. The abolition followed the Finance Act 2023, which extended the provision to non-resident investors (previously exempt), and the partial relief provided through DPIIT-recognised startup exemptions and CBDT safe-harbour valuations.
While the provision is abolished prospectively, residual issues remain for assessments of prior years (up to AY 2024-25) where Section 56(2)(viib) was applied. AMLEGALS advises startups and investors on defending pending assessments, appeals before the CIT(A) and ITAT, and the interaction between the abolished provision and the startup exemption framework.
Defending startups against angel tax additions in assessments for years up to AY 2024-25.
Representing startups in appeals before CIT(A) and ITAT against angel tax additions.
Advising on DCF and other valuation methodologies for prior-year compliance.
Advising on the DPIIT-recognised startup exemption framework that provided relief before abolition.
Advising on share-premium structuring for fundraising post-abolition.
Advising on the residual implications of the Finance Act 2023 extension to non-resident investors for prior years.
Yes. Section 56(2)(viib) of the Income Tax Act 1961, known as the angel tax, was abolished by the Finance (No. 2) Act 2024 with effect from assessment year 2025-26. Share premium received by a company from any investor — resident or non-resident — from 1 April 2024 onwards is not subject to this provision.
No. The abolition is prospective — it applies from assessment year 2025-26. Assessments for prior years (up to AY 2024-25) where Section 56(2)(viib) has been applied remain live and must be defended on the merits, including valuation challenges and reliance on the DPIIT startup exemption where applicable.
Startups recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Startup India scheme could apply for exemption from Section 56(2)(viib) by filing Form 2 with the DPIIT. The exemption was available for share premium received from resident investors up to Rs 25 crore (aggregate of paid-up capital and share premium). This exemption framework was relevant for years before abolition.
The provision taxed genuine share premium — the very mechanism through which startups raise capital at early-stage valuations — as income. The Income Tax Department frequently challenged startup valuations, demanding tax on the difference between the share premium received and the officer's assessment of fair market value, using methods that often did not account for the intangible value and growth potential of technology startups.
The Finance Act 2023 had extended Section 56(2)(viib) to non-resident investors with effect from AY 2024-25. The abolition by the Finance Act 2024 means this extension was effectively in operation for only one assessment year (AY 2024-25). From AY 2025-26, no investor — resident or non-resident — is subject to angel tax.
No. No engagement is treated as accepted until conflicts, scope and terms are confirmed in writing.
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