Angel Tax Exemption — DPIIT / Section 56(2)(viib)

Income Tax Act, 1961: Section 56(2)(viib) — previously taxed the excess of share issue price over fair market value as "angel tax" income in the hands of unlisted companies receiving investment from residents. This provision has been abolished by the Finance (No. 2) Act, 2024, with effect from Assessment Year 2025-26, removing the angel tax charge for all classes of investors (resident and non-resident alike), not merely the DPIIT-recognised startups covered by the earlier exemption notification. Companies receiving share consideration in FY 2024-25 (AY 2025-26) onward are no longer required to justify share valuation under Section 56(2)(viib) on this ground. This regulatory basis reflects the abolition itself; procedural treatment of assessments pending for years prior to AY 2025-26 (where the erstwhile DPIIT exemption route under Notification G.S.R. 127(E) applied) should be evaluated on the facts of each case.

Angel tax exemption refers to the relief available to DPIIT-recognised startups from the tax under Section 56(2)(viib) of the Income Tax Act 1961 — the provision that treated the premium on a share issue above fair market value as taxable income. Under the exemption framework, share issues by eligible startups to eligible investors were excluded from the provision, provided the prescribed conditions — including the aggregate limit on paid-up capital and share premium and the investor eligibility conditions — were met. VERIFY: the specific exemption conditions under Section 56(2)(viib) read with the DPIIT recognition framework, as applicable to the year of issue.

It is important to read the exemption in its current legal context: the Finance (No. 2) Act 2024 removed Section 56(2)(viib) entirely for share issues from Assessment Year 2025-26 onwards, so the angel tax no longer applies to new rounds. What remains are the earlier years — issues made up to FY 2023-24 — where the exemption still decides whether a startup that raised at a premium owes tax on that premium or not. That is where this service does its work.

For a startup that raised capital in those earlier years and is now under scrutiny, the exemption is a complete defence — if the conditions are met and the evidence is right. The assessment officer examines whether the startup held valid DPIIT recognition for the relevant year, whether the investors satisfied the eligibility conditions, and whether the issue stayed within the prescribed limits. Each of these is a documented fact, not an argument.

The risk of leaving this unaddressed is a tax demand on the entire premium with interest — a liability that can exceed the money the startup actually raised. This service is for startups that raised at a premium in years up to FY 2023-24 and want the exemption secured, either proactively before scrutiny or in response to a notice. We verify DPIIT recognition for the year, compile the investor and limit evidence, draft the exemption claim in the response, and represent the matter through assessment.