Angel Tax Abolished in India: What Removing Section 56(2)(viib) Means for Startup Investors in 2026

By Nitish Bharadwaj · Published Sep 8, 2026 · 7 min

Section 56(2)(viib) — the 'angel tax' that taxed a closely-held company on share premium collected above fair market value — was omitted from the Income Tax Act effective April 1, 2025 (FY 2025-26 onward), for resident and non-resident investors alike. Earlier rounds remain under the old valuation rules, including a 2023-25 window when foreign investors were briefly taxed too. This guide covers what the abolition changes, the DPIIT exemption that pre-dated it, and why FEMA's separate pricing floor for foreign investment still applies.

For over a decade, an Indian startup raising money at a valuation the tax department later disagreed with could end up with a tax bill on capital it had already spent building the business — money that was never income to begin with. That was angel tax, formally Section 56(2)(viib) of the Income Tax Act, and Budget 2024 abolished it entirely. The change is genuinely simple in effect but easy to get wrong on the details — including a one-year period when the tax briefly widened rather than narrowed, and a separate rule it doesn't touch at all.

What Angel Tax Actually Taxed

Section 56(2)(viib) applied when a closely-held (unlisted) Indian company issued shares to an investor at a price above the shares' 'fair market value,' as computed under Rule 11UA using the net asset value or discounted cash flow method. The excess — the difference between what the investor actually paid and the tax department's accepted fair value — was taxed as 'income from other sources' in the company's own hands, at its applicable income-tax rate, commonly cited around 30-35% inclusive of surcharge and cess. For an early-stage startup priced largely on future potential rather than current book value, a DCF valuation done by a merchant banker could differ sharply from what the tax officer accepted years later during scrutiny — turning a funding round into a retrospective tax demand on money the company no longer had as cash.

The Overlooked 2023 Twist: Foreign Investors Got Pulled In, Then Released a Year Later

Angel tax originally applied only to investments from resident Indian investors — a foreign VC or overseas angel investing in an Indian startup sat outside its scope. Finance Act 2023 changed that, extending Section 56(2)(viib) to non-resident investors as well, effective from April 1, 2023 (FY 2023-24). For a little over two years, both resident and foreign investment into an Indian unlisted company carried the same angel-tax valuation risk — a genuinely disruptive period for startups actively raising foreign capital. Budget 2024 then reversed course entirely, abolishing the provision for every class of investor, resident and non-resident alike.

What Actually Changed From April 1, 2025

The Finance (No. 2) Act, 2024, passed after the July 2024 Budget, omitted Section 56(2)(viib) from the Income Tax Act with effect from April 1, 2025 — applicable from Assessment Year 2026-27, meaning share issuances from FY 2025-26 onward. Share issuances made up to March 31, 2025 continue to be governed by the old rules, including the Rule 11UA valuation requirement and any pending scrutiny or notices already in motion. From FY 2025-26, an Indian unlisted company can issue shares to any investor — resident or foreign — at any price the two sides agree on, without the excess-over-fair-value amount being taxed as the company's income at all.

The DPIIT Exemption That Already Protected Many Startups

Angel tax was never a blanket tax on every startup funding round even before 2024. A February 2019 government notification exempted DPIIT-recognized 'eligible startups' from Section 56(2)(viib), provided the startup's aggregate paid-up share capital and share premium after the proposed issue didn't exceed ₹25 crore, and the investor met certain conditions (or fell into an exempt category such as a listed company, a SEBI-registered Category I AIF, or a specified class of NBFC). In practice, this meant the tax mainly bit startups that weren't DPIIT-recognized, had crossed the ₹25 crore threshold, or were raising from investor categories outside the exemption — plus, from 2023, any non-resident investor regardless of DPIIT status. The 2024 abolition removes the need to track any of these conditions going forward.

What This Doesn't Change: FEMA's Separate Pricing Floor

Abolishing income-tax angel tax has nothing to do with the pricing rule that sits under a completely different law — the FEMA (Non-Debt Instruments) Rules, administered by RBI, which require that shares issued to a non-resident investor not be priced below the fair value determined under an internationally accepted pricing methodology. That's a price floor for foreign investment, aimed at capital-account and foreign-exchange regulation, not an income-tax provision, and it continues to apply exactly as before regardless of what changed under Section 56(2)(viib).

What This Means If You're Angel Investing or Raising a Round

For an individual angel investor, the practical effect is one less risk sitting inside the startup you're backing — a company that later faces an angel-tax demand on a past round has less cash for growth, which indirectly affects your investment's runway. For a founder raising a seed or Series A round from April 2025 onward, a merchant banker's valuation report is no longer needed purely to satisfy Section 56(2)(viib) compliance, though one may still be required for other purposes, including the FEMA pricing floor if the round includes foreign investors. Sophisticated investors moving beyond direct angel cheques into pooled vehicles should also note that Category I AIFs, which specifically back early-stage startups, carry pass-through taxation of their own under Section 115UB — a separate framework from angel tax, unaffected by this change.

The abolition is a genuine simplification, not a partial relief with fine print attached — Section 56(2)(viib) is fully omitted, not reduced or conditionally suspended, for any share issuance from FY 2025-26 onward. The one thing worth remembering is that this is prospective only: rounds closed before April 1, 2025 remain governed by the old valuation rules, and any pending assessment or notice tied to an earlier round isn't wiped out by this change.