What is Angel Tax ?

Angel Tax is a income tax levied at rate of @30% on capital raised by unlisted company by issuing shares over its net asset value or fair market value.
This tax was introduced in 2012 Union Budget by then Finance Minister Sh. Pranab Mukherjee to address issue of money laundering of funds.
This tax is called angel tax as it impacts angel investments in Startups from financial investors.

What is problem with Angel Tax?

There is no definitive way to measure Fair Market Value of a Startup. Investors basically pay premium for the idea and the business potential of the Startupwhere as Tax officials calculate value of each share on basis of net asset value of share. Tax officials considers the premium paid by investors as income. This income is subject to income tax as per them.

After various representations from industry by Government , the Central Board of Direct Taxes (CBDT) had exempted angel investors from the Angel Tax clause subject to fulfilment of certain terms and conditions as specified by Department for Promotion of Industry and Internal Trade.

What are exemptions given by Department for Promotion of Industry and Internal Trade for exemption?

The Department for Promotion of Industry and Internal Trade for exemption has issued a circular in April 2018 giving exemption to Startups from angel tax subject to fulfilment of certain conditions. 

What are conditions for exemption from Angel tax?

Following are conditions for exemption from Angel tax:-
• Total funding from angel investors does not exceed Rs. 10 crore.
• Startups are required to get approval from an Inter-ministrial board
• Startups need to have certificate of valuation by a merchant banker.
The above conditions will only apply when angel investor has minimum net worth of Rs. 2 crore or Average returned income of Rs. 25 lakh in the proceeding three financial years.