Angel tax is levied on the capital raised via the issue of shares by unlisted companies from an Indian investor if the share price of issued shares is in excess of the fair market value of the company. The excess realization is considered as income and therefore, taxed accordingly U/S 56(2) (viib) of the Income Tax Act, 1961.
The finance act, 2012 introduced section 56(2) (viib) in the IT act which taxes any investment, received by any unlisted Indian company, valued above the fair market value by treating it as income. The investment in excess of fair value is characterized as ‘Income from other sources’ and the tax imposed on it is known as Angel Tax since it largely affects angel investors investing in startups.
1) Levied only on investments made by a resident investor, not applicable for investments made by any non-resident or venture capital funds.
2) Capital is raised by Unlisted companies
Exemption from Angel Tax: allowed on following conditions
(1) It has been recognized by DPIIT as an eligible Startup
(2) Aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of a share, if any, does not exceed, 25 Crore rupees:
In computing the aggregate amount of paid-up share capital, the amount of paid-up share capital and share premium of twenty-five crore rupees in respect of shares issued to any of the following persons shall not be included
(a) a non-resident
(b) a venture capital company or a venture capital fund
(c) * a specified company “ means a company whose shares are frequently traded within the meaning of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and whose net worth on the last date of the financial year preceding the year in which shares are issued exceeds one hundred crore rupees or turnover for the financial year preceding the year in which shares are issued exceeds two hundred fifty crore rupees.
(3) Startup shall not invest in any of the assets given below for the period of seven years from the end of the latest financial year in which shares are issued at a premium
(a) a building or land appurtenant thereto, being a residential house, other than that used by the Startup for the purposes of renting or held by it as stock-in-trade, in the ordinary course of business
(b) land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in-trade, in the ordinary course of business;
(c) loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is a substantial part of its business
(d) the capital contribution made to any other entity;
(e) shares and securities;
(f) a motor vehicle, aircraft, yacht, or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Startup for the purpose of plying, hiring, leasing, or as stock-in-trade, in the ordinary course of business
(g) jewelry other than that held by the Startup as stock-in-trade in the ordinary course of business;
(h) any other asset, whether in the nature of the capital asset or otherwise, or of the nature specified in section 56 of the Income Tax Act.