{"id":54348,"date":"2025-03-20T11:07:24","date_gmt":"2025-03-20T05:37:24","guid":{"rendered":"https:\/\/www.equentis.com\/blog\/?p=54348"},"modified":"2025-04-15T16:35:21","modified_gmt":"2025-04-15T11:05:21","slug":"what-is-angel-tax-impact-on-startups-and-investors-in-india","status":"publish","type":"post","link":"https:\/\/www.equentis.com\/blog\/what-is-angel-tax-impact-on-startups-and-investors-in-india\/","title":{"rendered":"What is Angel Tax? Impact on Startups and Investors in India"},"content":{"rendered":"
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Startups require capital to fuel their growth and bring their ideas to life. They often raise funds from angel investors for these financial needs, who invest in exchange for equity. <\/p>\n\n\n\n

Angel Investing<\/strong><\/a> is crucial in supporting innovative startups during their early stages. However, when startups raise funds at a valuation higher than their fair market value, this amount is not fully tax-free under the Income Tax<\/a> Act and becomes subject to Angel Tax.<\/p>\n\n\n\n

In this blog, we will explain the concept of Angel Tax in simple terms and highlight all the key details you need to know.<\/p>\n\n\n\n

What is Angel Tax?<\/strong><\/h2>\n\n\n\n

Angel Tax<\/strong> is a tax levied on the money raised by startups by issuing shares to investors. In simple terms, when a startup receives funding from an investor and gives them shares in return, the government wants to ensure that this money is genuine and not being used to hide black money.<\/p>\n\n\n\n

This tax comes under Section 56(2)(viib)<\/strong> of the Income Tax Act. If a startup issues shares to an investor at a price higher than the “fair market value” (FMV), then the extra amount is taxed as “income from other sources.”<\/p>\n\n\n\n

For example, if a startup’s share value is \u20b9100 per official calculations, but an investor pays \u20b9150 for it, the extra \u20b950 per share is taxed as income. This is what is called the Angel Tax<\/strong>.<\/p>\n\n\n\n

Why was Angel Tax Introduced?<\/strong><\/h2>\n\n\n\n

The main reason behind the Angel Tax was to stop the practice of money laundering \u2014 people showing black money as legitimate investments<\/a> in startups. However, many genuine startups and honest investors also got trapped in these rules in trying to catch wrongdoers.<\/p>\n\n\n\n

How Does Angel Tax Affect Startups?<\/strong><\/h2>\n\n\n\n

Imagine being a young entrepreneur trying to raise funds to realize your dream project. Suddenly, you are hit with a heavy tax bill because the government thinks you overvalued your shares.<\/p>\n\n\n\n

Here are some real impacts on startups:<\/p>\n\n\n\n