Author – Vishesh Gupta, a student of Chandigarh University
INTRODUCTION
The reform in the business structure of India over a period of time significantly demands the reform in policy structure of country. The need of the same can be traced by situation of startups and the will to increase the global startups.
The controversial topic in the waves “Angel Tax India”.
The income tax levied on unlisted companies when they raise capital from angel investors and the investment amount is considered to exceed the fair market value of the shares issued. This levied tax is known as Angel Tax. This provision was introduced in 2012 through Section 56(2)(viib) of the Income Tax Act, 1961. The tax was intended to prevent the use of inflated share valuations as a means to launder black money. Critics argued that this discouraged innovation and funding at a crucial stage of a startup’s growth.
For the concern, Department for Promotion of Industry and Internal Trade (DPIIT) came into knowledge in 2019.
The need for DPIIT exemption arose from the growing importance of startup growth, ease of doing business, and internal market regulation in India’s rapidly evolving economy. With startups playing a vital role in innovation and job creation, a centralized authority was essential to streamline policy support and simplify regulations.
DPIIT acts as a policy facilitator and regulator for:
- Startup recognition under the Startup India Scheme
- Implementing industrial policies and FDI regulations
- Coordinating with states for business reforms
- Managing initiatives like Make in India and Ease of Doing Business
This article explores the legal journey of angel tax from a punitive tool to a reform-driven exemption regime. It critically examines the statutory framework, DPIIT exemption mechanism, valuation controversies, judicial gaps, and the reforms under Finance Act, 2023. Through this analysis, the article seeks to assess whether India has truly moved from punishment to progress, or whether angel tax continues to clip the wings of startups despite policy intent.
Understanding Angel Tax in India
Section 56(2)(viib) of the Income Tax Act, 1961, introduces the concept of angel tax. As per the Finance Act, 2012, any startup (i.e., an unlisted company whose shares are not publicly traded) that raises capital from an angel investor is required to ensure that the share valuation is accurately assessed. If the shares are issued at a value higher than their fair market value, the excess amount is treated as income and taxed accordingly by the government.
The key text reads:
“Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares shall be chargeable to income-tax under the head ‘Income from other sources’(Section 56(2)(viib), Income Tax Act, 1961).”
Example to understand:
If a startup raises ₹15 crore from an angel investor while the FMV of the issued shares is ₹10 crore, the excess ₹5 crore is taxable at approximately 30.9%, as it is treated as unexplained income.
Primary objective of Angel Tax 2012:
- Prevent money laundering.
- Prevent tax evasion.
- Control over shell companies.
Drawbacks of Angel Tax:
- Tax burden on early-stage startups.
- Dispute over valuation.
- Issue for the genuine startups.
- Uncertainty in application.
- Complicated exemption process.
Abolishment of Angel Tax:
The iconic abolishment of Angel Tax was notified in budget 2024 with effect from 1st April,2025.
Need for Abolishment:
The Angel Tax in India was highly criticised by the early-stage startups, entrepreneurs.
The tax targeted the genuine startups also along with the shell companies and tax evaders.
This did not solve the problem but also discouraged the new investors and startups because of the fear of heavy tax.
Countries like UK, Singapore and the US were focused on providing tax benefits to encourage more startups, on the other hand Indian startups were facing issue of Angel tax.
The reform like DPIIT exemptions also failed because of heavy paperwork, startups were still getting notices, improper acts of authorities.
Significance of Abolishment:
The startups started to align with global standards.
Removal of angel tax would remove fear and hesitation among angel investors, both domestic and international.
With the removal of Angel Tax, startups can focus their efforts on expanding their operations and driving innovation, rather than dealing with legal disputes.
Abolishing angel tax would make India a more attractive jurisdiction for incorporation, funding, and growth.
It would reduce the workload on tax departments, eliminate disputes over share valuation, and clear backlogs of unnecessary litigation.
Abolishing this outdated provision would bring India closer to global investment norms.
Conclusion:
The Angel Tax provision, introduced under Section 56(2)(viib) of the Income Tax Act, was originally aimed at curbing the misuse of share capital by shell entities and tackling money laundering through inflated share valuations. While its intent was legitimate, the rigid and wide-ranging application of this law unintentionally impacted genuine startups. These companies often raise funds based on projected growth and innovation, rather than current profitability, making their valuations difficult to quantify in conventional terms.
As a result, many startups were put in a challenging position, forced to defend valuations that naturally reflect future potential. The law classified such investments as taxable income, leading to legal ambiguity, financial strain, and deterring investor interest. Despite being certified by the DPIIT and fulfilling the required exemption conditions, many startups still received tax notices, intensifying the prevailing uncertainty.
Although the government has attempted to address these concerns through recognition mechanisms, valuation norms, and legislative changes in Finance Acts, the system remains cumbersome. It still demands heavy compliance and leaves room for subjective interpretation by tax authorities. Abrupt policy shifts — such as the 2024 rollback of exemptions for foreign investors — have only added to the unpredictability surrounding startup funding.
Eliminating this provision would foster greater risk-taking, attract both domestic and international investment, and support India’s ambition of becoming a leading global hub for innovation.
DPIIT Recognition-the Angel Tax Exemption Mechanism
The Department was initially set up in 1995 as a central body functioning under the Ministry of Commerce and Industry.
Its present structure took shape in 2019, with a focus on shielding startups from the unintended negative consequences of the Angel Tax.
As part of the Startup India Initiative, DPIIT grants official recognition to eligible startups and offers several advantages, including tax exemptions, relaxed regulatory requirements, and other supportive measures.
To qualify for DPIIT recognition, an entity must be structured as a private limited company, LLP, or a registered partnership firm, and must fulfill certain conditions regarding innovation, scalability, and a maximum age of 10 years from the date of incorporation.
Need for DPIIT Recognition:
- To Avail Angel Tax Exemption
Startups that are recognised by DPIIT can claim exemption from Angel Tax, which is otherwise imposed on investments received above the fair market value of shares. - To Prove Startup Legitimacy
DPIIT recognition acts as a formal acknowledgment of a startup’s authenticity. It helps differentiate genuine businesses from shell entities or companies set up primarily for tax avoidance. - To Build Investor Confidence
Recognition by a central government authority significantly boosts a startup’s credibility and trustworthiness. It reassures investors about the legitimacy and stability of the business, making them more willing to invest. - To Unlock Broader Government Benefits
DPIIT-recognised startups are eligible for multiple incentives beyond tax exemptions — such as faster processing of applications, easier compliance requirements, government certification, and simplified exit procedures. - To Align with National Startup Policies
By securing DPIIT recognition, startups position themselves to benefit from various government programs, funding initiatives, and innovation-driven schemes aimed at supporting sustainable growth.
CONCLUSION:
For startups in their early stages, securing investment is already a challenging task — and the added concern of being taxed for attracting genuine funding only makes it harder. In this context, DPIIT recognition acts as a reliable safeguard, offering exemption from the burdens of angel tax along with meaningful advantages such as simplified regulatory compliance, expedited patent support, and increased investor trust.
More than a government-issued certificate, it represents an institutional acknowledgment that says, “Your idea matters.” Although the application process may require time and effort, the credibility and legal assurance it provides are immensely valuable for any startup aiming to grow with confidence.
Reforms under the Policy
- Introduction of Angel Tax (2012)
The tax with the aim to target shell companies and tax evaders. The policy unintentionally impacted the genuine startups in negative way.
- Startup India initiative (2016)
Initiative done to start granting recognition to the companies. It is considered as a step towards the major reforms.
- DPIIT Exemption Mechanism (2019)
DPIIT has formally announced the exemption mechanism available to startups that are recognized under its framework.
Introduction of FORM-16 for online tax relief.
- Extension of Angel Tax (2023)
The tax was extended to the non residents also. Foreign venture capital funding is now also liable to taxation.
- Abolition of Angel Tax (2024)
In the budget of 2024-25, the Finance Minister announced the complete removal of Angel Tax for all class of investors.
Section 56(2)(vii)(b) was effectively repealed.
Comparative Jurisdiction
It is important to examine the POV of different countries on Angel Tax to determine the reforms and its abolition. For making any understanding the global status should be known well.
- United States
The US focused on the capital gains taxing and not on the fundings of startups.
This approach was encouraged by the investors and startups which resulted in increasing startups and boost in economy.
This was considered as the motivating approach.
- United Kingdom
A pro-investor and pro-startup stance has been adopted by the UK government.
Their schemes offers tax reliefs to early stage companies and do not impose taxes on startup share premiums.
This approach resulted in increased startups and encouraged investors.
- Singapore
There was no provision like Angel Tax or any other similar provision.
Singapore is considered amongst the most startup friendly country globally.
Their approach focused on growth and innovation and not value and tax.
This highlights that Across the world, countries are choosing to trust and support their startups — not tax them for dreaming big. India’s move to scrap the angel tax is a step in the right direction. Now, the focus should be on building a system that’s simple, stable, and supportive, just like in other leading startup nations.
Because at the end of the day, startups don’t just need capital — they need confidence in the system they’re building in.
Closing Remarks
From Burden to Breakthrough
For a long time, the Angel Tax felt like a roadblock for India’s startup dream. Instead of encouraging innovation, it created doubt. Startups raising funds based on their future ideas were taxed simply because their valuations didn’t fit into fixed formulas. What was meant to stop tax abuse ended up hurting genuine businesses trying to build something meaningful.
Founders were burdened with notices and asked to explain why investors believed in them. Many early-stage startups — already struggling to survive — had to deal with complex paperwork, valuation reports, and legal uncertainty. For some, this fear held back growth. For others, it discouraged investors altogether.
The 2024 abolition of the Angel Tax signified a long-overdue reform. It was more than a policy update — it was a clear message from the government: We believe in your potential. Combined with DPIIT recognition, tax exemptions, and simpler processes, the move helped restore confidence among both startups and investors.
But this progress is just the beginning. Many startups still face challenges — from past tax cases to ongoing compliance issues. Some investors are still cautious, remembering how quickly policies have shifted in the past. And several founders in smaller cities still don’t have easy access to legal or financial help to benefit fully from these changes.
Even so, this shift matters. India is no longer treating startups as risks — it’s starting to see them as partners in growth. The focus is slowly moving from penalty to possibility, from suspicion to support.
As we turn this corner, the goal should be clear: to build an environment where startups can grow with fewer obstacles and more encouragement. The burden is lifting — and the breakthrough is real. Now, it’s time to build forward with trust, clarity, and consistency.
