Exemption from Angel Tax [Section 56(2)(viib)]

Upload Date

15/07/2025

(a) Exemption from Angel Tax [Section 56(2)(viib)]

Note: Provisions of Section 56(2)(viib) are not applicable with effect from Assessment Year 2025-26.

What is angel tax?

Angel tax is a term used for the tax payable by a closely held company under Section 56(2)(viib). This tax is payable in respect of any excess premium received by a company from the issue of shares provided the following conditions are satisfied:

i. Shares (equity or preference shares) are issued by a closely held company;

ii. The consideration for the issue of shares is received from any person; and

iii. The consideration received for the issue of shares exceeds the face value and fair market value of shares.

If the above conditions are satisfied, the consideration received exceeding the fair market value of the share shall be taxable in the hands of the issuer company. However, this provision does not apply to an eligible start-up that fulfils the conditions prescribed in the Notification issued by the DPIIT. So a company registered with DPIIT shall get an exemption from the angel tax if it fulfils the prescribed conditions.

Conditions prescribed by the DPIIT

A Start-up recognised by DPIIT shall get immunity from the provisions of Section 56(2)(viib) if it fulfils the following conditions:

Condition as to the 'paid-up share capital'

The aggregate amount of paid-up share capital and share premium of the start-up, after the issue or proposed issue of shares, should not exceed Rs. 25 Crores. While calculating this threshold limit, the issue of shares to the following persons shall not be included:

i. A non-resident person;

ii. Venture Capital Company;

iii. Venture Capital Fund; and

iv. Listed Company whose net worth exceeds Rs. 100 Crores or turnover exceeds Rs. 250 Crores for the financial year preceding the year in which shares are issued.

Condition as to the 'utilisation of funds'

The eligible start-up should not invest in any of the following assets for a period of 7 years from the end of the latest financial year in which the shares are issued at a premium:

i. Land or building, being a residential house, other than that used for the purposes of renting or held as stock-in-trade in the ordinary course of business;

ii. Land or building, not being a residential house, other than that occupied by a start-up for its business or renting purposes or held as stock-in-trade in the ordinary course of business.

iii. Loans and advances, if a start-up is not engaged in the ordinary business of lending of money;

iv. Capital contributions to any other entity;

v. Shares and securities;

vi. Motor vehicle, aircraft, yacht, or any other mode of transport, if the cost of such an asset exceeds Rs. 10 lakhs other than that held by the Start-up for the purpose of plying, hiring, leasing, or as stock-in-trade in the ordinary course of business;

vii. Jewellery held otherwise than as stock in trade; and

viii. Archaeological collections, drawings, paintings, sculptures, any work of art or bullion.

How to claim the exemption from angel tax?

The exemption from applicability of angel tax shall be available in respect of all shares issued by the start-up from the date of its incorporation, except for the shares issued in respect of which an addition under section 56(2)(viib) has been made in an assessment order made before the date of issue of the notification.

To claim this exemption, the start-up has to file a declaration in Form 2 with the DPIIT along with the details of the company, such as name, date of incorporation, registration/ incorporation no., contact details, etc. Within the form, a self-declaration form has to be attached in PDF format, and it should be printed on the company's letterhead and digitally signed by the authorised signatory. The DPIIT shall forward the self-declaration form to the CBDT for approval. The start-up can issue the shares after successfully submitting the self-declaration form. The CBDT, thereafter, shall assess the application, and it can either accept it or reject it after giving an opportunity of being heard.

Withdrawal of exemption

In case the start-up invests in any of the assets specified above before the end of 7 years from the end of the latest financial year in which the shares are issued at a premium, the exemption provided under section 56(2)(viib) shall be revoked with retrospective effect.

When the exemption is withdrawn, the consideration received from the issue of shares, as exceeding the fair market value of such shares, shall be deemed to be the income of the company chargeable to tax for the previous year in which such failure occurs. Such income arising on withdrawal of exemption shall be deemed to be under-reported by the company in consequence of the misreporting and, consequently, a penalty of an amount equal to 200% of tax payable on the under-reported income (i.e., the difference between issue price and fair market value of shares) shall be levied as per Section 270A.

How to file Form 2 with DPIIT?

Step 1: Log in to https://www.startupindia.gov.in/