For a decade, “angel tax” – section 56(2)(viib) – haunted every Indian startup fundraise: issue shares above “fair market value” and the premium could be taxed as the company’s income. That era is over. The provision was abolished from AY 2025-26 for every class of investor, and the new Income-tax Act 2025 contains no equivalent. But “angel tax is dead” does not mean “valuations no longer matter” – three other regimes still police your round. Here is what died, what survives, and what your fundraise paperwork still needs.
What was abolished – and how completely
| Item | Position |
|---|---|
| The provision | Section 56(2)(viib): closely-held company issuing shares above FMV → excess taxed as the company’s “income from other sources” |
| Abolition | Finance (No. 2) Act 2024 – effective AY 2025-26 (share issues from FY 2024-25 onward) |
| Coverage | All unlisted companies, all investors – resident angels, NRIs, foreign funds. Not limited to DPIIT startups (the old exemption route is history) |
| Under the Income-tax Act 2025 | No re-enactment. The 2025 Act carries no equivalent of 56(2)(viib) – premium issues above FMV have no automatic tax consequence from tax year 2026-27 |
| Legacy exposure | Open assessments for AY 2024-25 and earlier still run under the old law – the DPIIT exemption declaration (₹25 crore aggregate cap, prohibited-asset conditions) remains relevant only there |
What STILL applies – the three surviving regimes
1. Section 68 – unexplained cash credits (the real successor)
The assessing officer can still ask who invested, from what funds, and whether the transaction is genuine. For closely-held companies the source-of-source rule applies to share capital: if identity, creditworthiness or genuineness fails, the credit is taxed at the penal ~78% effective rate. Post-abolition, this is where fundraising scrutiny actually lives. Keep: investor KYC, their ITRs/financials, bank trails, and board/valuation records.
2. Investor-side tax on cheap shares
Section 56(2)(x) (now the corresponding provision of the 2025 Act) taxes an investor who receives shares below FMV by more than ₹50,000 – so sweetheart allotments and down-round top-ups still need Rule 11UA valuation support, just from the opposite direction.
3. FEMA pricing for foreign investors
For NRI and foreign rounds the FEMA rulebook never blinked: shares issued to non-residents still need a fair-value certificate (issue price at or above FMV) under Rule 21 of the NDI Rules, with FC-GPR reporting in 30 days. Only non-repatriation NRI investment escapes the pricing guidelines. Full detail in our FDI instruments & pricing guide.
What your fundraise file should contain now
| Document | Why it still matters |
|---|---|
| Valuation report (registered valuer / merchant banker; CA for FEMA) | FEMA floor for foreign money; 56(2)(x) comfort; s.68 genuineness |
| Investor KYC + source-of-funds | Section 68 – identity and creditworthiness |
| Board/shareholder resolutions, PAS-3, share certificates | Companies Act mechanics; the paper trail assessors ask for first |
| FIRC + KYC + FC-GPR acknowledgment | Foreign/NRI rounds – FEMA compliance |
| Term sheet / SHA | Genuineness + rights structure (keep FEMA-compatible – no assured exits for non-residents) |
A short history, for context
- 2012: introduced as an anti-money-laundering measure against share-premium laundering;
- 2016–2019: notices hit genuine startups en masse; the DPIIT exemption route (recognition + declaration, ₹25 crore cap) offered partial shelter;
- 2023: scope expanded to foreign investors – peak pain;
- July 2024: Budget abolished it outright from AY 2025-26;
- April 2026: the Income-tax Act 2025 took effect with no equivalent provision – the chapter closed.
Closing a round – domestic or foreign?
We paper the raise for the rules that still exist: valuation, section 68 file, FEMA pricing and FC-GPR – clean from term sheet to acknowledgment.
Talk to My Cloud AccountantFrequently asked questions
Is angel tax completely abolished in India?
Yes – section 56(2)(viib) ceased to apply from AY 2025-26 for all companies and all investor classes, and the Income-tax Act 2025 contains no equivalent provision. Only open assessments of earlier years still involve the old law.
Do startups still need valuation reports after angel tax abolition?
In most funded rounds, yes – for FEMA pricing where any investor is a non-resident, for investor-side section 56(2)(x) comfort where shares could be seen as issued cheap, and as genuineness evidence under section 68. The report’s purpose changed; the need mostly did not.
Can the tax officer still question my share premium?
Yes, under section 68 – not on the quantum of premium, but on the identity, creditworthiness and genuineness of the investors. Unexplained credits are taxed at penal rates, so the investor documentation file remains essential.
Does abolition help NRI and foreign investors too?
Yes – the 2023 extension of angel tax to foreign investors died with the provision. But FEMA pricing still applies to them: issues to non-residents need a fair-value floor and FC-GPR reporting, except on the NRI non-repatriation route.
Based on the Finance (No. 2) Act 2024, the Income-tax Act 2025 (effective 1 April 2026), Rule 11UA and the FEM (NDI) Rules 2019. Last reviewed: July 2026.