Angel Tax and what’s it got to do with my startup?

You’re a startup founder who has been putting your nose to the grindstone and you have finally managed to build a company worth seeking an angel round for (YAY!). You get a great valuation for your company from exactly the investor you had been hoping for. She cuts you a fat check and you go to your office (or home, if you’re the WFH kind), pop open a champagne bottle, and celebrate.

Then, tax season rolls around. And you have a mini heart attack (metaphorically of course). You see that you have a potentially massive tax burden on part of the angel money you received. That’s the Angel Tax at play.

The Angel Tax that legally comes under Section 56(2)(viib) of the Income-tax Act, 1961, is a tax that the government levies on the excess premium charged by the private company from investors over its fair market valuation.

Need that simplified?

Basically, if you are a startup or a private company that has raised money from an angel investor or a venture capitalist in the private equity market, you need to be cognizant of the tax cost that may arise.

But, but, but, bite down on that gasp for a bit. The good news is that Angel Tax is not applicable on the entire angel round you raise. It is only levied if you issue shares at a price to an investor that is higher than the “fair market value” of the company. Then, the excess premium between the fair market value of the shares and the capital you raised is what you owe taxes on. It is considered as “Income from Other Sources”.

For instance, let’s assume the fair market value of your company’s share ₹5,000 and you raise ten crore rupees at ₹8,000 per share. So, what happens?

Your company may have to bear a tax cost in the range of 25-35% depending on the tax regime you follow and certain other conditions.

So wait, do I have to pay Angel Tax?

Let’s quickly break it down for you. You will have to pay Angel Tax if you have raised money above your FMV and:

• You have raised from a domestic/foreign investors (except certain class of investors such as venture capital firms or alternative investment funds)
• You are not registered as a startup with the Department for Promotion of Industry and Internal Trade (DPIIT) and granted eligible tax exemptions

How do I apply for an exemption?

• Get a certificate of recognition from the DPIIT by filling up their online application form and submitting the necessary documents. This includes your Certificate of Incorporation, Memorandum of Association, Articles of Association, and audited financial statements
• Once you have obtained the DPIIT certificate, file Form 2 with the Inter-Ministerial Board of Certification to seek approval for Angel Tax exemption
• Exemption from Angel Tax may be granted based on verification of documents and eligibility criteria

Summing up

Angel tax provisions don’t apply if you raise capital at the fair market value of your business and if otherwise;

• You are raising funds from a venture capital firm, or an AIF
• You’re registered as a startup with the DPIIT, and have obtained the tax exemption