Angel Tax Calculator (Section 56)

The Finance (No. 2) Act 2024 added a sunset to Section 56(2)(viib) of the Income Tax Act: the clause does not apply from assessment year 2025-26. In practice that means shares issued on or after 1 April 2024 no longer attract angel tax, whatever the premium over fair market value and whether or not your startup is DPIIT-recognised.

If you are raising now, angel tax is not a cost you need to plan for. You still need a valuation report for other rules (company law and, for foreign investors, foreign-exchange pricing rules), so keep getting one.

Angel tax was the common name for Section 56(2)(viib). When an unlisted company — typically a startup — issued shares at a price above their fair market value (FMV), the difference (the share premium) was treated as the company's 'income from other sources' and taxed at the company's normal rate.

The tax fell on the company, not the investor. A high-priced round could therefore leave the founders with a tax bill on money they had raised, not earned — which is why it was unpopular with founders and angels alike, and why it was eventually removed.

For shares issued before 1 April 2024, the old rule can still matter in an assessment or a tax notice for that year. Broadly, the premium over FMV could be taxed unless an exemption applied. The main reliefs were:

• DPIIT-recognised startups that had filed the prescribed exemption declaration.
• Shares issued to certain specified investors, such as SEBI-registered venture capital funds and banks.
• Shares issued at or below FMV, which had no premium to tax.

Whether tax is actually due on an old round depends on the valuation method used, the exemptions you claimed and what the assessing officer accepted. The calculator shows the premium — the arithmetic part — and leaves the tax question to your CA.

The Income Tax Rules set out methods for valuing unquoted shares. The two most used are:

Net Asset Value (NAV) method

Based on the company's book value — assets minus liabilities. Usually gives a low valuation for early-stage startups with few assets.

Discounted Cash Flow (DCF) method

Projects future cash flows and discounts them to today. More relevant for high-growth startups, and usually gives a higher FMV.

Even without angel tax, a defensible valuation protects you: investors, auditors and, for foreign money, your bank will ask how the issue price was set.

The premium is simple arithmetic: issue price minus FMV, times the number of shares issued. Here is an example:

1. For a new round, price it on the commercial terms you agree with investors — angel tax is no longer a constraint.
2. Still get a valuation report and keep it with your board and allotment papers.
3. If you received a notice about a round before April 2024, take it to a CA with the valuation report and any DPIIT exemption declaration you filed.
4. DPIIT recognition is still worth having for other benefits, such as the Section 80-IAC deduction and startup-only grants.

From tax year 2026-27 (income earned from 1 April 2026) the Income-tax Act 2025 replaces the 1961 Act. This page uses the 1961 section numbers, which still apply to FY 2025-26 and earlier years. For the current year, the same rules sit under these new numbers:

• Section 80-IAC → section 140 of the Income-tax Act 2025