Angel Tax 2024 Guide: Meaning, Applicability and Exemption

You might be familiar with the Angel Tax meaning if you run your own business. Or, you might have come across the term ‘Angel Investors’. These investors invest in ‘growth-stage’ start-ups in exchange for equity. Angel investments are essential for early-stage start-ups, as they might not have enough asset base to keep as collateral for debts. 

From this angel funding, start-ups are required to pay the Government of India (GoI) in the form of Angel Tax. 

Here is all you need to know about Angel Tax meaning, applicability, Angel Tax rate and exemptions.

What is Angel Tax? 

Section 56 (2) (viib) of the Income Tax Act pertains to Angel tax. Angel Tax was first introduced in the Finance Act 2012 and came into force in April 2013 onwards.

Angel Tax applies to investments made by Angel Investors to start-up firms. Start-up firms are those not listed on the stock exchange. However, Angel Tax does not apply to all Angel Investments except those whose total value exceeds the investee company’s Fair Market Value (FMV). 

Angel Tax is considered ‘income from other sources’ and is imposed by the GoI to prevent money laundering. 

What is Angel Tax India’s applicability? 

Let us understand the applicability of the Angel Tax in India with the help of a hypothetical example. 

Suppose a start-up receives an angel investment worth ₹20 lacs. The angel investors have received a percentage of company equity in exchange for this investment. However, the FMV of the start-up is ₹15 lacs. 

Therefore, the difference between the angel investment and the company’s FMV is treated as excess money. In this, the excess cash is ₹5 lacs and would thus be taxed under Section 56 (2) (viib) of the Income Tax Act. 

It is important to note that Angel Tax only applies to start-ups funded by resident Indian investors. Venture capital investments are also out of the ambit of Angel Tax.

What is the Angel Tax rate in India?

As discussed above, Angel Tax would apply to the excess amount calculated based on the difference between angel investment and FMV. Currently, the Angel Tax rate is a hefty 30.9 per cent and applies to not more than two per cent of India’s population. Taxpayers can segregate this tax rate into two parts, viz. 30 per cent plus 3 per cent. Here, the Angel Tax rate is 30 per cent, and an additional 3 per cent is levied as applicable cess. Both these components are imposed under Section 56 (2) (viib) of the Income Tax Act. 

What are Angel Tax exemptions? 

The start-up funding scenario has changed manifold over the last few years. Earlier, any investment made by Angel Investors was considered ‘income from other sources’. However, in 2019, GoI introduced numerous exemptions to Angel Tax. These exemptions are aimed at encouraging start-up culture and entrepreneurship in India. 

Post 2019, the following exemptions were introduced on Angel Tax subject to the following conditions: 

• Start-ups recognised by the Dept. of Promotion of Industry and Internal Trade (DPIIT)
• Early-stage unlisted companies with a total paid-up capital of up to ₹25 crores. However, this total paid-up capital should exclude venture capital investments or investments received in exchange for equity issued to non-resident investors. 
• The Fair Market Value of the start-up must be calculated and determined by a professional certified merchant valuer as per Rule 11 UA (2) (b) of the Income Tax Act.
• Start-ups funded by foreign investors and non-resident investors, including Angel Investments from such individuals or bodies
• Start-ups who have not made any of the following investments in their initial seven years of issuing shares:
  • Land or building 
  • Loans or advancement 
  • Capital contributed to any other entity. 
  • Any mode of transportation worth more than ₹10 lacs 
  • Shares, other securities and archaeological collections

Start-ups recognised by DPIIT should furnish the applicable documents to the Central Board of Direct Taxes (CBDT). This Angel Tax exemption for DPITT-recognised start-ups would apply only after CBDT approval. 

Conclusion

Angel Tax is a rare tax that applies to not more than two per cent of India’s population. This tax applies to Indian start-ups funded by resident Indian Angel Investors. It was formed to prevent money laundering and encourage the growth of Start-up culture in India.