Angel Tax Is Gone. What Still Matters for Startup Fundraising in India? 

India’s abolition of angel tax has removed one significant tax risk from startup fundraising. But valuation, Companies Act, FEMA and legacy tax compliance obligations continue to matter. 

Introduction

The abolition of the so-called “angel tax” was one of the most significant tax reforms for India’s startup ecosystem in recent years. Section 56(2)(viib) of the Income-tax Act, 1961, which had historically allowed the tax authorities to tax certain share premium received by closely held companies in excess of the fair market value of the shares, was made inapplicable from 1 April 2025, with effect from Assessment Year 2025-26. The measure applied across investor categories, including resident and non-resident investors. 

The reform was particularly significant because the provision had become a source of valuation disputes and litigation for startups raising capital at valuations that did not necessarily align with tax authorities’ assessment of fair market value. The 2023 amendment had also extended the provision to consideration received from non-residents, increasing the relevance of the issue for cross-border venture capital and private equity investments. 

However, the abolition of Section 56(2)(viib) should not be understood as the abolition of valuation or fundraising compliance. For startups raising capital in 2026, the better question is therefore not simply “Is angel tax gone?”, but rather: What compliance and valuation requirements continue to apply now that angel tax is no longer a fundraising tax risk? The answer requires looking beyond the Income-tax Act, 1961 and considering the current framework under the Income-tax Act, 2025, the Companies Act, 2013, FEMA and the rules governing foreign investment. 

What exactly was abolished?

Section 56(2)(viib) historically applied where a closely held company received consideration for issuing shares at a price exceeding their fair market value. Subject to the statutory framework and applicable exemptions, the excess over fair market value could be treated as income in the hands of the issuing company. 

The provision was introduced through the Finance Act, 2012 as an anti-abuse measure. In 2023, its scope was expanded by removing the requirement that the investor be a resident, thereby bringing certain investments by non-residents within its ambit from 1 April 2024. 

The position changed with the Finance (No. 2) Act, 2024, which provided that Section 56(2)(viib) would not apply on or after 1 April 2025. The Government has subsequently confirmed that the provision ceased to apply from AY 2025-26 and that the valuation rules applicable specifically for Section 56(2)(viib) no longer operate for that provision. Accordingly, for shares issued on or after 1 April 2025, a startup does not face an income-tax charge under the erstwhile angel-tax provision merely because its issue price exceeds the fair market value determined under the earlier Section 56(2)(viib) framework. 

This is a genuine simplification. But it is not a general exemption from valuation or fundraising regulation. 

What has not disappeared?

The abolition of angel tax removes one specific income-tax exposure. It does not remove the other legal frameworks that govern a startup’s fundraising. For a typical equity financing round, at least four separate questions may still need to be addressed: 

1. Is the issuance compliant with the Companies Act, 2013? 
2. If a non-resident is investing, does the transaction comply with FEMA and applicable foreign investment pricing requirements? 
3. Does any other income-tax provision apply to the transaction? 
4. Are the company’s valuation and transaction records sufficiently robust for future tax, regulatory, accounting or transaction purposes? 

The fact that the answer to the first question is no longer influenced by Section 56(2)(viib) does not make the other questions disappear. 

Valuation remains relevant but for different reasons

The most important conceptual shift following the abolition of angel tax is that valuation is no longer primarily about defending the startup against a Section 56(2)(viib) addition for a new share issuance. That does not mean valuation can be disregarded. 

Income-tax considerations

Under the Income-tax Act, 1961, Section 56(2)(x) continues to address situations where a person receives specified property, including shares and securities, without consideration or for inadequate consideration, subject to the statutory thresholds and exceptions. The provision therefore addresses a fundamentally different situation from Section 56(2)(viib): the former operates from the recipient’s perspective, whereas the erstwhile angel-tax provision operated from the issuer company’s perspective. 

The corresponding framework has now moved into the Income-tax Act, 2025, which came into force on 1 April 2026. Section 92(2)(m) deals with specified receipts of money and property, including property received for inadequate consideration, while Section 92 defines “property” to include shares and securities.

For current transactions, the valuation framework is prescribed under the Income-tax Rules, 2026. Rule 57 sets out methods for determining fair market value for the purposes of Section 92 and other specified provisions. For example, the rules prescribe a formula-based methodology for unquoted equity shares. 

The practical implication is important: the abolition of angel tax does not mean that an issue of shares at an artificially low price is automatically tax-neutral for the investor. The precise application of the recipient-side provisions will depend on the facts of the transaction, the nature of the investor, the consideration paid and the statutory exceptions. 

Companies Act compliance continues independently

A startup’s fundraising is not governed by the Income-tax Act alone. Depending on the structure of the transaction, the company may need to comply with provisions relating to private placement, preferential allotment, authorised share capital, shareholder approvals, valuation, filings and maintenance of corporate records under the Companies Act, 2013 and the rules made thereunder. 

For example, Section 62(1)(c) of the Companies Act contemplates issue of shares to persons other than existing shareholders pursuant to a special resolution and provides for pricing based on a valuation report of a registered valuer, subject to the applicable statutory conditions. 

Section 247 also establishes the statutory framework for valuation by registered valuers where valuation is required under the Companies Act. Accordingly, the disappearance of Section 56(2)(viib) does not eliminate the need to examine whether a particular financing round requires a valuation report, shareholder approval or other corporate action. 

The tax provision may have disappeared; the corporate-law framework has not. 

Foreign investment remains subject to FEMA pricing requirements

This is particularly important for startups raising capital from offshore investors. The abolition of angel tax does not override the Foreign Exchange Management Act, 1999 and the rules and regulations governing foreign investment. 

For an unlisted Indian company receiving investment from a person resident outside India, the applicable FEMA pricing framework continues to require the issue price of equity instruments to comply with prescribed valuation/pricing requirements. RBI’s framework provides for valuation based on an internationally accepted pricing methodology on an arm’s-length basis, duly certified by an appropriately qualified professional, subject to the applicable rules. This distinction is critical. 

A company may now issue shares at a price above the fair market value relevant under the erstwhile angel-tax provision without triggering Section 56(2)(viib). However, that does not mean that the company is free to disregard FEMA pricing requirements where the investor is a non-resident. The abolition of angel tax therefore removes a direct tax concern, but it does not eliminate the foreign exchange regulatory framework applicable to cross-border investment. 

What about DPIIT recognition?

DPIIT recognition remains relevant to startups for reasons that are independent of angel tax. The Government continues to provide a range of benefits and regulatory relaxations to recognised startups, including tax-related benefits and concessions relating to carry-forward of losses and employee stock option taxation, subject to the applicable eligibility requirements. 

The transition to the Income-tax Act, 2025 has also changed the numbering of several provisions. For example, the startup profit deduction that was historically available under Section 80-IAC of the Income-tax Act, 1961 is now reflected in Section 140 of the Income-tax Act, 2025. The provision provides for a 100% deduction of eligible business profits for three consecutive tax years, subject to the statutory conditions. 

DPIIT’s 2026 compendium of benefits similarly identifies the startup tax exemption, ESOP tax deferral and relaxation concerning carry-forward and set-off of losses as continuing benefits under the new framework. Therefore, a startup should not treat the abolition of angel tax as a reason to discontinue maintaining or reviewing its DPIIT recognition and related eligibility. At the same time, DPIIT recognition should no longer be presented as a prerequisite for avoiding angel tax on new share issuances. That distinction is fundamental because the underlying Section 56(2)(viib) charge itself is no longer applicable. 

What happens to old angel-tax disputes?

The abolition is not a blanket retrospective cancellation of all historical angel-tax disputes. The Income-tax Act, 2025 came into force on 1 April 2026, but the repeal and transition framework preserves the operation of the earlier law for tax years governed by the Income-tax Act, 1961. The Income Tax Department has expressly clarified that assessments, appeals and other proceedings relating to earlier years continue under the old framework notwithstanding the repeal of the 1961 Act. 

Consequently, a startup that issued shares in a year when Section 56(2)(viib) applied may continue to face assessment, reassessment, appeal or other proceedings concerning that historical transaction. For example, if a startup received a share premium in FY 2022-23 and an addition under the erstwhile Section 56(2)(viib) is being contested in 2026, the abolition effective from 1 April 2025 does not, by itself, extinguish the historical dispute. 

This makes preservation of historical valuation reports, financial projections, investment agreements, board materials, correspondence with investors and other supporting documentation particularly important. 

What happened to the DPIIT angel-tax exemption?

Before the abolition, DPIIT-recognised startups could obtain exemption from the operation of Section 56(2)(viib), subject to the conditions prescribed under the relevant notification framework. That exemption was commercially significant when Section 56(2)(viib) was an operative charging provision. 

For new issuances after 1 April 2025, however, the practical relevance of that exemption has substantially fallen away because the underlying provision itself is no longer applicable. The Income Tax Department continues to describe the historical exemption mechanism while expressly noting that Section 56(2)(viib) does not apply from AY 2025-26. Accordingly, practitioners should distinguish between: 

• historical transactions, where the notification framework may remain relevant to the tax position for the relevant year; and 
• new issuances, where there is no new Section 56(2)(viib) exposure to be exempted. 

For legacy matters, the precise notification and conditions applicable in the relevant year should continue to be reviewed rather than assuming that the abolition retrospectively resolves the issue. 

What should startups and investors do differently now?

The abolition of angel tax should result in a reset of the fundraising compliance checklist, not the abandonment of the checklist.  For a new financing round, startups should consider the following: 

For the company

• Determine the legal structure of the proposed issuance and the applicable provisions of the Companies Act. 
• Prepare and maintain appropriate valuation documentation. 
• Identify whether the transaction involves a non-resident investor and therefore requires FEMA analysis. 
• Confirm sectoral caps, entry routes and other foreign investment conditions, where applicable. 
• Complete the relevant corporate approvals and statutory filings. 
• Preserve the investment agreement, term sheet, board materials and valuation records. 
• Maintain a clear record of the commercial rationale for the valuation and financing terms. 
• Separately assess any tax consequences applicable to the investor or the transaction under the current Income-tax Act, 2025. 

For investors

Investors should similarly distinguish between commercial valuation and tax/regulatory valuation. A negotiated startup valuation may reflect growth projections, intellectual property, market opportunity, founder capability and expected future earnings. A statutory valuation methodology, however, may serve a different regulatory purpose. 

The fact that these numbers do not always coincide does not necessarily make a transaction legally problematic. What matters is identifying which valuation is required for which legal purpose, and documenting the basis on which it has been determined. 

The real significance of the abolition

The abolition of angel tax should be viewed as a shift in the nature of fundraising risk rather than the disappearance of fundraising regulation.  For new issuances, startups no longer need to defend a share premium against an income-tax addition under the erstwhile Section 56(2)(viib). This is particularly significant for early-stage businesses whose commercial valuations may be driven by future growth rather than current financial metrics. 

At the same time, valuation remains relevant under other legal regimes. Companies Act requirements continue to apply to specified issuances; FEMA continues to regulate cross-border investment; other income-tax provisions may apply in appropriate circumstances; and valuation evidence can remain important for future transactions, exits, secondary transfers, ESOPs and regulatory compliance. 

The result is therefore not “valuation no longer matters.” It is: Valuation matters for different reasons now. 

Conclusion

The abolition of angel tax is a meaningful structural reform for India’s startup ecosystem. From 1 April 2025, new share issuances are no longer subject to the erstwhile Section 56(2)(viib) charge merely because the issue price exceeds fair market value. The reform removes a significant source of tax uncertainty and valuation litigation that had accompanied startup fundraising for years. 

But the reform should not be mistaken for a general relaxation of fundraising regulation. In 2026, startup fundraising must be assessed against the Income-tax Act, 2025 and Income-tax Rules, 2026, alongside the Companies Act, FEMA and other applicable regulatory frameworks. The valuation question has therefore moved from “Will the company be taxed on its share premium?” to the broader question of “What valuation is required, under which law, and for what purpose?” 

For startups and investors, the practical lesson is straightforward: angel tax may be gone, but disciplined fundraising compliance is not. 

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Last Updated on 20 August, 2026