The Angel Tax refers to Section 56 (2) (vii b) of the Income Tax Act. It is a levy on the funds that the startups raise from the angel investors. It applies only to the amounts that surpass the fair market value of any company.

The Angel Tax was first brought in the year 2012. This was introduced by the then Finance Minister of India Pranab Mukherjee. The major objective of this was to curb money laundering via startup investments.

In the 2019 Union Budget, the government relaxed the rules of angel tax by exempting the startups registered with the Department for Promotion of Industry and Internal Trade from the provision.

This move was not universal, it was only for those startups certified by the Inter-Ministerial Board.

Big Call From The Finance Minister

Last year in July Finance Minister Nirmala Sitharaman announced that the Angel Tax will be removed and this will bring relief to startups and their investors.

While presenting her 7th Budget, Nirmala Sitharaman made an announcement about the Abolishing of the ‘Angel Tax’ for the investors.

About The Angel Tax Issue

As reported by Moneycontrol, several startups have expressed their concern regarding this tax. They pointed it as unfriendly.

Startups stated that Assessing Officers often take the discounted cash flow method to see the valuation, as per media reports.

Several Startups mentioned about getting tax notices for Angel investments raised 2-4 years earlier. In the year 2019, when the controversy related to the Angel Tax was at its peak, A LocalCircles survey showed that more than 73% of the startups that raised capital between Rs 50 lakh and Rs 2 crore got Angel Tax notices from Income Tax department

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