Start-ups raising funding in India have long worried about angel tax—the tax under Section 56(2)(viib) when share issue prices exceed fair market value (FMV).
Recognizing the hurdles it creates for venture capital flows, the CBDT has introduced a new valuation safe-harbour framework, effective from April 1, 2025, offering more clarity and flexibility.
This blog explains the latest safe-harbour rules for angel tax and what founders must do before fundraising in FY 2025–26.
Legal Reference
- Section 56(2)(viib), Income Tax Act, 1961
- CBDT Notification dated __/2025 (expected for Budget 2025 rollout)
What is Angel Tax Under Section 56(2)(viib)?
If an unlisted company (typically a start-up) issues shares to a resident at a price higher than FMV, the excess is taxable as “income from other sources” in the hands of the company.
For example:
- FMV = ₹100/share
- Issue Price = ₹150/share
- ₹50 per share taxed under Section 56(2)(viib)
This tax hit can severely affect early-stage fundraising.
What’s New in CBDT Safe-Harbour for 2025?
- Valuation based on multiple methods now allowed:
- DCF (Discounted Cash Flow) Method
- NAV (Net Asset Value) Method
- Recognized External Valuer certification
- 10% Variation Safe-Harbour:
- If the share issue price is within 10% higher than the certified FMV, no tax will apply.
- DPIIT-Recognized Start-ups are automatically exempted if valid at the time of issue.
Example: Safe-Harbour Calculation
Company XYZ’s FMV certified = ₹100/share (DCF valuation)
- They issue shares at ₹109/share.
- Since 109 is within 10% margin (₹110), no angel tax under Section 56(2)(viib).
Had they issued at ₹120/share without DPIIT registration, excess ₹10 per share would have been taxable.
Conditions to Claim Safe-Harbour
- Valuation report must not be older than 90 days from the date of share allotment
- Use of a Category I Merchant Banker registered with SEBI for DCF valuation is recommended
- Complete DPIIT start-up recognition process if eligible
- Maintain all investor declarations and board resolutions properly
Practical Steps for Founders Before Raising Funds
- Obtain updated valuation reports before each funding round
- Cross-check the issue price band with the 10% safe-harbour
- Apply for DPIIT start-up recognition well before share issuance
- Document subscription agreements and share certificates meticulously
- Consult CA/legal advisors during funding term sheet negotiations
Conclusion
The new CBDT safe-harbour rules make it easier for genuine start-ups to raise funds without fear of crippling angel tax demands. Proper valuation planning, compliance documentation, and DPIIT registration can now protect start-ups against harsh tax exposure under Section 56(2)(viib).
Call to Action and Disclaimer
Planning a fundraising round in FY 2025–26?
Need help with 56(2)(viib) valuation compliance or DPIIT application?
Schedule a meeting with our Chartered Accountant, Anshul Goyal, by visiting:
Disclaimer: I am Anshul Goyal, a Chartered Accountant licensed with ICAI, India. This blog is for general information and does not constitute legal advice.
Frequently Asked Questions
1. Does angel tax apply to foreign investors?
No. Section 56(2)(viib) applies only to share issuances to Indian residents.
2. Is DPIIT registration mandatory to claim exemption?
Not mandatory, but it offers automatic exemption from angel tax.
3. Can I issue shares at a premium beyond 10% margin?
Yes, but any excess over safe-harbour may be taxed unless fully justified.
4. Is DCF valuation better than NAV for start-ups?
Yes. DCF usually reflects future earning potential, favoring higher FMV.
5. What happens if valuation is challenged later?
Proper documentation and certified reports help defend the price during scrutiny.