top of page
  • Writer's pictureRFMLR RGNUL


This piece is authored by Anchit Singla, a student of B.A.LL.B (Hons.) at the Rajiv Gandhi National University of Law,


Job creation and economic growth is the solemn duty of all modern governments, as written in their constitutional[i] and legal documents. The promise of eradicating unemployment and providing economic opportunities to the educated youth has been the backbone of election campaigns in India. However, despite all the affirmations, the question remains; is the government alone capable of achieving a country with no jobless citizens.

Global research data on the subject is conclusive that job creation is beyond the control of the government and big businesses. A research[ii] undertaken by the Kaufmann Foundation in the 1970’s along with other organisations confirm that almost all job opportunities since the last 40 years were born from start-ups and angel businesses. Looking forward to its more prosperous counterpart in the US, the Government of India ventured into the young and dynamic world of start-ups. The Indian government since the last few years have spread its support to all the budding entrepreneurs in the country. Multiple schemes including PM Narendra Modi’s flagship, the startup-India program have flooded the streets with opportunities for young people.

However, the demon in this flowery world of start-ups is the “Angel” Tax. The government of India on several occasions have decided to tax the young businesses (for very valid reasons in some cases). Let us understand what is special about this tax and trace its evolution in the Indian taxation system.


Closely held private companies often receive equity funds from the outsiders. When these investments are made at a premium to the fair price, tax laws have so far held that the amount raised in excess to the fair value is taxable. This amount is assessed as “income from other sources” under Section 56 (ii) of the Income Tax Act, 1961. This tax was not just applied to the matured private companies, but the young start-ups were also included. This made the start-ups a victim of this indiscriminate taxing provision.

As start-ups have very few sources of mainstream funding, investors and start-ups lobbied for the tax to be removed. Already, funds sourced from non-residents and venture capital funds were exempt from this tax. Angel tax was introduced in 2012 with a motive to curb money laundering via small companies. In addition, while the government eased some norms on Feb. 19, it has still ensured that the money raised by a startup is put to the right use. For instance, to be eligible for tax exemptions, a startup should not invest its funding into an immovable property, transport vehicles above Rs10 Lakh, loans and advances, and capital contribution to other entities, among other things.[iii]

According to Inc42’s ‘The State of The Indian Start-up Ecosystem Report’[iv], and iSPIRT Foundation’s report, Seed-stage funding is down by 21% from $191 million (January-September 2017) to $151 Million (January-September, 2018) while the number of early-stage rounds has come down by 28.5% in 2018. The number of unique domestic investors is down by 48% since 2015.

In an annual start-up cum SME survey done by community-based social media platform LocalCircles, 38% start-ups said they received one or more tax notices in 2018 while 97% were of the opinion that income tax officers must be educated on start-up valuations.[v]


Angel tax in India has evolved and is still not finding its perfect place. Where it is an effective solution against money laundering, it is a disaster for start-ups and young businesses. The timeline of angel tax in the country is as follows:

Angel Tax Incorporation (March 16, 2012): Based on the CBDT, the Wanchoo Committee and other reports and recommendations on measures to tackle black money, former finance minister Pranab Mukherjee on March 16, 2012, inserted Section 56(2)(viib) in the I-T Act 1956. According to the amendment, share premium in excess of FMV will be treated as income of the unlisted/closely held company. A 30.9% tax proposed is to be levied on share premium referred to in Section 56(2)(viib) included in income. Besides Section 56(2)(viib), Section 68 was also amended in 2012. The two new provisions made in Section 68 seek the nature and source of any sum credited, as share application money, share capital, share premium, etc., in the books of a closely-held company. Further, the credited amount is treated as explained only if the source of funds is also explained by the assessee company and the resident shareholder and the explanation is found to be satisfactory by the assessing officer.

Angel Tax Implementation (April 1, 2013): The Income Tax Amendment Act, 2012 incorporating angel tax comes into effect.

Angel Tax issue raised by Start-up and investors (December 19, 2017): Angel investor Mohandas Pai raises the angel tax issue saying that despite the government making certain tax exemptions for start-ups, start-ups are still being haunted by I-T officials for angel tax on angel funding.

Petition at (January 18, 2018): Led by Sreejith Moolayil, a number of Indian startups and members of the startup community start an online petition on, seeking a revision in the angel tax structure. Addressed to PM Narendra Modi, Union finance minister Arun Jaitley, and Union minister for commerce and industry Suresh Prabhu, among others, the petition urges the government to uphold the "shared dream of Startup India, Standup India" by making the country's Income Tax regime more start-up-friendly.

Section 50CA inserted (February 6, 2018): Section 50CA insertion tweaks the FMV computation methodology. The CBDT issues a notification that no coercive action should be taken against start-ups that have calculated FMV in accordance with Discounted Cash Flow method.

Amendments to SEBI (Alternative Investment Funds) Regulations, 2012 (March 28, 2018): SEBI approves amendments to the SEBI (Alternative Investment Funds) Regulations, 2012, regarding angel funds. According to the latest amendments: The maximum investment amount in venture capital undertakings by an angel fund in any venture capital undertaking increases from INR 5 Cr to INR 10 Cr. The requirement of minimum corpus of an angel fund reduces from INR 10 Cr to INR 5 Cr. Increase in maximum period for accepting funds from angel investors from three years to five years. The requirement of filing of scheme memorandum to SEBI by angel funds is replaced with the requirement of filing term sheet containing material information, as specified by SEBI, within 10 days of launching scheme. The provisions of the Companies Act, 2013 shall apply to the Angel fund, if it is formed as a company.

Angel Tax exemption for startups (April 11, 2018): The DIPP announces angel tax exemption for Inter-Ministerial Board (IMB)-approved startups, stating that startups founded before 2016 and with up to INR 10 Cr in angel funding will also be eligible for tax exemptions.

Angel Tax issue raised again (December 18, 2018): Numerous startups, investors raise angel tax issue with the DIPP and the CBDT. Commerce and industry minister Suresh Prabhu takes up the issue with the finance minister Arun Jaitley.

CBDT notification (December 24, 2018): The CBDT issues a notification asserting that no coercive active is to be taken against startups who received I-T demand-orders.

DIPP notification (January 16, 2019): DIPP issues another notification fast-tracking and skipping the IMB route of angel tax exemption approval mechanism. According to the new notification, a startup will be liable for the angel tax exemption, if: The aggregate amount of paid-up share capital and share premium of the startup after the proposed issue of a share, if any, does not exceed INR 10 Cr. and, the investor/proposed investor has a returned income of INR 50 Lakh or more in the preceding year and not worth exceeding INR 2 Cr.

DIPP organises a roundtable meeting (February 4, 2019): The Department for Promotion of Industry and Internal Trade (DPIIT) organises a roundtable discussion with representatives from IVCA, iSPIRT Foundation, Indian Angel Networks and others. A Working Group is formed to finalise the draft guidelines pertaining to angel tax exemption.

Working Group Members meet DIPP and CBDT officials (February 8, 2019): Two startups Travelkhana and AddoDoc Technologies- claim that CBDT deducting INR 36 Lacs and INR 72 Lacs from their account as part of the angel taxation. The CBDT rebuts that the mentioned were under Section 68 and not Section 56(2) (viib). Working Group proposes blanket exemption for all DPIIT-recognised startups. The Group also proposes to amend startup definition from existing 7 years to 10 years

Angel Tax exempted (February 19, 2019): The DPIIT issues a blanket exemption for startups. According to the new notification: The startups will continue to be considered as startups till period of 10 years since their incorporation. Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded INR 100 Cr. All the startups are liable to receive angel tax exemption regardless of their share premium values given that the aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of share, if any, does not exceed, INR 25 Cr.

[i] Part IV, Constitution of India, 1950.

[ii] Research available at,





bottom of page