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Finance Minister Nirmala Sitharaman’s Budget speech on Tuesday announced ending the contentious angel tax for all classes of investors, heeding a demand of Indian startups.
Angel tax, officially Section 56(2) (viib) in the Income Tax Act, applies to unlisted companies in India when they raise capital by issuing shares to investors at a price exceeding a company's fair market value.
The excess amount is treated as income and taxed at a rate above 30 per cent.
Introduced in 2012, the provision aimed to prevent tax avoidance and fund misuse. It is called angel tax because it significantly affects angel investments in startups.
The provision was initially applicable to local resident investors but its ambit was expanded as part of the government’s anti-tax avoidance move.
More than 80,000 startups registered with the Department Promotion of Industry and Internal Trade (DPIIT) did not come under the tax’s purview.
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