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Home > Income Tax > Help Center > Angel Tax Last Updated: Dec 08th 2023
Startups develop business models that are replicable and scalable. Startups actively pursue innovative concepts that have the potential to generate employment opportunities, boost efficiency, or introduce transformative technologies that impact both the economy and way of life.
Startups are eligible for a variety of tax advantages, contingent upon meeting specific criteria. The Start-up India Initiative, which supports the development of start-ups in India and promotes entrepreneurship, was officially launched on January 16, 2016.
This document covers
"Angel Tax" and "Angel Investor" have gained considerable traction among startups in recent times.
An angel investor is defined as an individual or organization that offers to provide financial support to a startup in the form of ownership interests, convertible debt, or equity.
In general, angel investors allocate their capital towards initial phases of enterprises characterized by elevated levels of risk. In contrast to venture capitalists, angel investors invest primarily with their own funds in enterprises.
Angel Tax is a tax that startups and other companies that sell shares for more than their fair market value must pay.
"Income from Other Sources" includes the premium the company got that was more than the fair market value of the shares. This premium is taxed at 30% plus an education cess.
If a startup that has been approved by the Department for Promotion of Industry and Internal Trade (DPIIT) meets the following requirements, it will not have to pay the Angel Tax:
The Aggregate amount of paid-up capital and share premium including the proposed issue of shares should not exceed Rs 25 crore. The issue of shares to the following persons shall not be included while calculating the threshold.
The eligible startup should not invest in any of the following assets for a period of 7 years from the end of financial year preceding the year in which shares are issued.
Note: If the startup invests in any of the assets before the end of 7 years from the end of latest financial year in which the shares are issued at a premium, exemption provided shall be revoked with retrospective effect.
Recommended: You can talk to an EZTax expert about Angel Tax and Startup Investments right now to get a personalized view.
Finance Act 2023 has amended some of the provisions of section 56(2)(viiib) of Income Tax Act 1961. The Amendments are as follows.
Disclaimer: This article provides an overview and general guidance, not exhaustive for brevity. Please refer Income Tax Act, GST Act, Companies Act and other tax compliance acts, Rules, and Notifications for details.