Update (September 2026): Angel tax no longer applies. Section 56(2)(viib) was omitted by the Finance (No. 2) Act, 2024 with effect from AY 2025-26, and from 1 April 2026 Rule 11UA was replaced by Rule 57 of the Income-tax Rules, 2026. This article is kept for historical reference. For the current rules on valuing shares, and who must sign each report, see our share valuation guide.
4th Oct, 2023
Angel tax is essentially the tax that unlisted companies are liable to pay on the capital they raise through issue of shares.
Recently the government amended the rules for Startup Valuation and added 5 new methods of valuation.
However, these methods cannot be used in all cases. These can be used only in case the investment is received from a non resident person.
In addition there have been lot of other changes to help the startups. Let us decode the provisions related to the Angel Tax in the Income Tax Act. In the Finance Act 2023, the government removed the exemption provided to investments by non-residents from the applicability of section 56 (2) (viib) more popularly known as “The Angel Tax”.
On 25th September 2023, the government notified the amendment to the Rule 11UA (2) of the Income Tax Rules, 1962 which is considered as the ‘bible’ for the valuation of startups under the income tax.
The government intention to plug the loophole for unaccounted money going as investments in unlisted companies but at the same time reduce the hardships for the genuine investments into startups has made these provisions quite complex.
Let us try to decode “The Angel Tax” provisions for the benefit of the startup community.