Union Budget 2024: What is angel tax which has been abolished by FM Nirmala Sitharaman

Finance Minister Nirmala Sitharaman has announced to remove the Angel Tax.

Angel Tax is a term used to refer to the income tax payable on the capital raised by unlisted companies through the issue of shares through off-market transactions. 

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 seen in excess of the fair market value of the company. The excess realisation is considered as income and therefore, taxed accordingly.  It's a provision under Section 56(2)(viib) of the Income Tax Act, 1961. It essentially treats the investment received by startups from external investors as "income from other sources" and taxes it at a rate of 30%.

Introduced in 2012, the Angel Tax was intended to curb the use of unaccounted money through the subscription of shares in closely held companies at inflated valuations. However, venture capitalists and industry experts demanded the removal of angel tax to further promote a more conducive environment for startups in India.