Angel tax rules likely to be released by the end of May

The centre will release the draft rules pertaining to the angel tax imposed on start-ups by next week, sources have told Business Today Television.

Angel tax is the tax that has to be paid when an unlisted company issue shares to an investor at a price that is more than its fair market value.

In the past, the angel tax was only applicable to resident investors. However, Budget 2023–24 introduced provisions to extend the angel tax to non-resident investors as of April 1, 2024.

The Finance Act, 2023, has amended Section 56(2) (viib) of the I-T Act, thereby bringing overseas investment in unlisted held companies under the tax net.

According to the new provisions, an angel tax will be applied to the premium over the fair market value (FMV) of a company’s shares during a funding round to raise capital. The excess premium received on sales of shares by an Indian unlisted company to a foreign investor will be construed as "income from other sources" and taxed.

The new provisions have become a challenge for privately held companies, as they could hurt investments by foreign investors in India. The startup and venture capital industries have sought exemptions for certain foreign investor classes. However, it was clarified that no tax will be levied on investments in startups registered with the industrial promotion department.