When startups raise money from individual investors (called angel investors) to grow their business, they sometimes get hit with a surprising tax called Angel Tax.
Angel Tax has long been seen as a barrier in the Indian startup ecosystem. Instead of encouraging growth, it often created fear and confusion. Imagine getting penalised just because someone believed in your startup's potential and invested at a higher valuation!
Startups need funding to hire talent, build products, and expand. But this tax used to take away a big chunk of that money—just because the government thought the valuation was “too high.”
That’s where the term Angel Tax comes in—a tax on hope and growth.
Angel Tax is a tax that startups have to pay if the government thinks they raised money at a value higher than what their company is really worth.
Let’s say your startup gets ₹1 crore from an investor. If the government thinks your company is only worth ₹70 lakhs, then the remaining ₹30 lakhs is considered “extra income”—and that’s taxed.
Why Did the Government Charge Angel Tax?
The idea behind angel tax was to stop people from using fake startups to launder black money. However, it also became a big problem for genuine angel tax startups that needed funds to grow.
The good news? In the Union Budget 2024, the Finance Minister announced that angel tax will be abolished starting the financial year 2025-26. This is a major win for the startup ecosystem, as it encourages entrepreneurs and investors to confidently build and back new ventures.
Before it was abolished, angel tax in India came with a heavy price. Startups had to pay:
That made the effective Angel Tax Rate 30.9%.
So, if your startup raised money from an angel investor at a higher valuation than what the tax department considered “fair,” the extra amount was taxed. This made things tough for young startups trying to grow.
For Example
Let’s say a startup named FreshSip Beverages raised ₹10 crore from an angel investor.
The tax authority estimated that the startup’s fair market value was only ₹6 crore.
That means ₹4 crore was seen as “extra”—not part of the company’s real value.
Here’s what happens:
That ₹4 crore was treated as income, and the startup had to pay 30.9% angel tax on it.
That’s ₹1.236 crore straight out of their funding!
Some startups could avoid angel tax—but only if they met certain rules:
If all these conditions were met, the startup could get angel tax exemption.
Even though the tax is slowly being phased out, here are some smart steps startups can take:
The good news: the Indian government is listening to startups.
Let’s say a startup issues shares to an angel investor:
Step-by-Step Calculation
Angel Tax Charged On: ₹30,00,000
Angel Tax = ₹30,00,000 × 30.9% = ₹9,27,000
So the startup had to pay ₹9.27 lakhs as tax, just because the investment came at a higher valuation than what the tax authorities believed was the fair value.
Angel tax was a rule that taxed startups on the money raised from investors if the government believed their business was overvalued. It created challenges for many angel tax startups. But from FY 2025-26, this tax is going away—making it easier for young businesses to raise capital and grow.
This is a big step forward for India's startup community.
1. What is Angel Tax in India?
Angel Tax is a tax levied on startups in India when they raise funds from an angel investor at a valuation higher than what the Income Tax Department considers fair. The difference between the raised amount and the fair market value was taxed as income.
2. Why was Angel Tax imposed on startups?
The government introduced Angel Tax under Section 56(2)(viib) of the Income Tax Act to prevent money laundering and black money circulation through fake startups. However, it affected many genuine startups seeking legitimate funding.
3. What was the Angel Tax rate before it was abolished?
Before abolition, Angel Tax in India was charged at:
This resulted in an effective angel tax rate of 30.9% on the excess investment over fair market value.
4. When will Angel Tax be scrapped in India?
Angel Tax will be abolished starting from FY 2025-26 as announced in the Union Budget 2024. This move is expected to boost the Indian startup ecosystem by encouraging investors and founders.
5. What are the problems startups faced due to Angel Tax?
Angel Tax created issues like:
6. Which startups were exempt from Angel Tax?
To be exempt from Angel Tax, a startup had to:
7. Can you give an example of Angel Tax calculation?
Yes. If a startup raised ₹80 lakhs but the fair market value as per tax officers was ₹50 lakhs, the extra ₹30 lakhs was taxed at 30.9%, resulting in an angel tax payment of ₹9.27 lakhs.
8. How can startups avoid Angel Tax-related issues?
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