# Angel Tax Abolished in India and What Foreign Investors Still Face

> Source: https://krystal7.com/insights/angel-tax-abolished-foreign-investors
> Publisher: Krystal7 Consultants (Krystal7 Innovations Private Limited), Gurugram, India
> Author: CA Nandini
> Published: 17 Mar 2026; updated 24 Oct 2026
> Summary: Angel tax under section 56(2)(viib) does not apply from AY 2025-26, but FEMA fair value, section 92(2)(m) and section 102 still apply to share issues.

*Written by CA Nandini Hasija, Krystal7 Consultants. Last updated 23 October 2026.*

## AI Overview Summary

- Angel tax under section 56(2)(viib) of the Income Tax Act, 1961 does not apply from AY 2025-26, so share premium received from 1 Apr 2024 is not taxed as the company's income.
- The Income Tax Act, 2025, in force from 1 Apr 2026, has no successor to section 56(2)(viib), and rule 57 of the Income Tax Rules, 2026 dropped the old share issue valuation methods.
- Non resident investors were inside angel tax only for share issues in FY 2023-24, after the Finance Act, 2023 extended the clause to consideration received from any person.
- FEMA still requires shares issued to a non resident to be priced at or above fair value under rule 21 of the NDI Rules, with a certificate not more than 90 days old.
- Section 102 still lets the tax officer question unexplained share capital, and section 92(2)(m) still taxes anyone who receives shares below fair market value.

**Yes, angel tax is abolished. Section 56(2)(viib) of the Income Tax Act, 1961 does not apply from AY 2025-26, under the Finance (No. 2) Act, 2024. Share premium a company receives from 1 Apr 2024 is not taxed as its income. The Income Tax Act, 2025 has no successor. FEMA still sets a fair value floor for shares issued to non residents.**

This page covers what angel tax was, how it reached foreign investors in FY 2023-24 and how it ended. It shows which old share issues are still exposed. It then sets out the FEMA, Companies Act and income tax rules that still apply, with a table of old and current rules.

## Is angel tax abolished in India?

Yes. The Finance (No. 2) Act, 2024 switched off section 56(2)(viib) of the Income Tax Act, 1961 from AY 2025-26. That covers share premium received in FY 2024-25 and later years. The Income Tax Act, 2025, in force from 1 Apr 2026, has no equivalent clause. A premium above fair market value no longer creates income for the company.

The Income Tax Department's [angel tax page](https://www.incometaxindia.gov.in/w/exemption-from-angel-tax-section-56-2-viib-) states the position plainly. It says the provisions of section 56(2)(viib) "are not applicable with effect from Assessment Year 2025-26". The Budget speech of 23 Jul 2024 (paragraph 153) proposed to abolish angel tax "for all classes of investors".

The abolition reached back to the start of FY 2024-25. A share issue on 1 Apr 2024 falls in AY 2025-26, so it is outside the clause. That holds even though the Budget came on 23 Jul 2024. The Finance (No. 2) Act, 2024 received assent on 16 Aug 2024.

Abolition removed one income tax charge. It did not remove the other rules that test the price of a share issue. A foreign investor still meets the FEMA pricing floor and the Companies Act valuation. The cash credit rule and the fair market value rule for receivers of cheap shares also remain.

## What was angel tax under section 56(2)(viib)?

Angel tax taxed a closely held company that issued shares above both face value and fair market value. The excess of the consideration over fair market value was the company's income from other sources. The rule applied to a company "not being a company in which the public are substantially interested". It started from AY 2013-14.

The Finance Act, 2012 inserted clause (viib) to stop unaccounted money entering companies as share premium. It covered only consideration from residents until AY 2023-24. The company paid tax on the excess at its normal rate, in the year it received the money.

Fair market value was the higher of two measures. One was the value under rule 11UA of the Income Tax Rules, 1962. The other was a value the company could substantiate to the Assessing Officer from its assets, including goodwill, know how, patents and other intangibles. Rule 11UA(2) gave the company a choice between a net asset value formula and a discounted cash flow value from a merchant banker.

The proviso to the clause excluded some receipts:

1. Consideration a venture capital undertaking received from a venture capital company, a venture capital fund or a specified fund.
2. Consideration from a class of persons the Central Government notified. Startups recognised by DPIIT used this route.

The DPIIT route needed a declaration in Form 2. The Income Tax Department page describes the conditions. Paid up capital and share premium after the issue could not exceed INR 25 crore, excluding money from non residents and venture capital investors. For seven years the startup could not invest in specified assets. The list included land not used in the business, shares and securities, vehicles above INR 10 lakh, jewellery and art. A breach revived the tax with a penalty of 200 percent under section 270A.

## How did angel tax reach foreign investors from 1 April 2023?

The Finance Act, 2023 extended section 56(2)(viib) to consideration received from any person. From AY 2024-25, share premium from a non resident fell inside the clause as well. So a closely held company issuing shares to a non resident above fair market value in FY 2023-24 faced tax on the excess. CBDT Notification No. 30/2023 shows the change: from 1 Apr 2023 it exempts consideration a DPIIT startup receives "from any person". Read the amended clause in the Income Tax Act, 1961 text on incometaxindia.gov.in for the exact words.

The change brought foreign venture funds, corporate investors and foreign parents into scope for the first time. It caught a foreign parent subscribing to a rights issue of its Indian subsidiary at a premium. It also caught a Series A from a US fund priced off a recent global round.

CBDT then softened the change by notification and rule. All three notifications sit on the [CBDT notifications page](https://www.incometaxindia.gov.in/notifications). Read the text there before relying on an exclusion or a method for an FY 2023-24 issue.

1. **Notification No. 29/2023 of 24 May 2023.** It excluded classes of non resident investors, such as government bodies, central banks, sovereign wealth funds and regulated entities. It also excluded Category I foreign portfolio investors, endowment funds, pension funds and broad based pooled vehicles resident in 21 listed countries.
2. **Notification No. 30/2023 of 24 May 2023 (S.O. 2275(E)).** With effect from 1 Apr 2023, it kept the DPIIT startup exemption for consideration "received from any person", including non residents. It points to the conditions in DPIIT notification G.S.R. 127(E) of 19 Feb 2019. The [Gazette copy](https://egazette.gov.in/WriteReadData/2023/246044.pdf) is on egazette.gov.in.
3. **Notification No. 81/2023 of 25 Sep 2023.** It amended rule 11UA from that date. Non resident investors gained five more valuation methods, with price matching and a 10 percent safe harbour.

| Method under rule 11UA(2) after 25 Sep 2023 | Resident investor | Non resident investor |
|---|---|---|
| Net asset value (equity shares) | Yes | Yes |
| Discounted cash flow by a merchant banker | Yes | Yes |
| Comparable company multiple | No | Yes |
| Probability weighted expected return | No | Yes |
| Option pricing | No | Yes |
| Milestone analysis | No | Yes |
| Replacement cost | No | Yes |
| Price matching with a notified non resident or a venture capital or specified fund, within 90 days | Yes | Yes |
| 10% safe harbour over the value under a listed method | Yes | Yes |

The window turned out short. Non resident money was inside angel tax only for share issues from 1 Apr 2023 to 31 Mar 2024. That is the one year a foreign investor's premium could be taxed in the company's hands.

## When and how was angel tax abolished?

The Finance (No. 2) Act, 2024 sunset section 56(2)(viib) from AY 2025-26. The Budget speech of 23 Jul 2024 announced it. The Memorandum to the Finance (No. 2) Bill, 2024 said the clause will not apply from AY 2025-26. No replacement charge took its place.

The [Memorandum](https://www.indiabudget.gov.in/budget2024-25/doc/memo.pdf) said the Government had decided to sunset clause (viib). The amendment took effect from 1 Apr 2025 and applies from AY 2025-26. So the clause still governs assessments for AY 2024-25 and earlier.

| Date | Event | Instrument |
|---|---|---|
| AY 2013-14 | Clause (viib) applies to premium from residents | Finance Act, 2012 |
| 19 Feb 2019 | DPIIT startup exemption with Form 2 declaration | DPIIT notification G.S.R. 127(E) of 19 Feb 2019 |
| AY 2024-25 (FY 2023-24) | Clause extended to premium from non residents | Finance Act, 2023 |
| 24 May 2023 | Excluded non resident classes; startup exemption kept from 1 Apr 2023 | Notification Nos. 29/2023 and 30/2023 (S.O. 2275(E)) |
| 25 Sep 2023 | New valuation methods and safe harbour in rule 11UA | Notification No. 81/2023 |
| 23 Jul 2024 | Abolition announced, paragraph 153 of the Budget speech | Budget 2024-25 |
| 16 Aug 2024 | Clause switched off from AY 2025-26 | Finance (No. 2) Act, 2024 |
| 1 Apr 2026 | New Act with no successor clause | Income Tax Act, 2025 |

## Which share issues can still be taxed under the old rule?

Share issues in FY 2012-13 to FY 2023-24 remain within section 56(2)(viib) for the assessments of those years. A tax officer can still add excess premium in an open assessment or a valid reassessment. For premium from non residents, only FY 2023-24 issues are exposed. Issues from 1 Apr 2024 are outside the clause.

So the abolition protects new rounds, not old ones. A company that raised a premium round in FY 2023-24 from a US or UK investor should keep its valuation file ready. The file should hold the rule 11UA report and its date. It should also hold any price matching evidence and any Form 2 filed with DPIIT.

| Share issue in | Assessment year | Premium from residents | Premium from non residents |
|---|---|---|---|
| FY 2012-13 to FY 2022-23 | AY 2013-14 to AY 2023-24 | Within the clause | Outside the clause |
| FY 2023-24 | AY 2024-25 | Within the clause | Within the clause, subject to Notifications 29/2023 and 30/2023 |
| FY 2024-25 | AY 2025-26 | Outside the clause | Outside the clause |
| FY 2025-26 | AY 2026-27 | Outside the clause | Outside the clause |
| From 1 Apr 2026 | Tax year 2026-27 onwards, 2025 Act | No such charge | No such charge |

Section 536 of the Income Tax Act, 2025 keeps proceedings and actions under the 1961 Act alive where consistent. So the repeal of the 1961 Act on 1 Apr 2026 does not end an angel tax case for AY 2024-25. The DPIIT exemption also stays relevant for those years. A startup that filed Form 2 must still respect the seven year asset restriction for the old issue.

## Does the Income Tax Act, 2025 replace angel tax?

No. Section 92 of the Income Tax Act, 2025 lists income from other sources and has no clause that taxes share premium received by a company. Rule 57 of the Income Tax Rules, 2026 also dropped the share issue valuation methods that sat in rule 11UA(2). The fair market value rule for receivers of property remains in section 92(2)(m).

The [section 92 page](https://www.incometaxindia.gov.in/w/section-92-113) carries clause (m), the successor of section 56(2)(x) of the 1961 Act. It taxes a person who receives money, land or other property for no consideration or for less than fair market value. It does not tax a company for receiving more than fair value.

The [rule 57 page](https://www.incometaxindia.gov.in/w/rule-57-4) gives an adjusted net asset formula for unquoted equity shares. It has no discounted cash flow option, no methods for non resident investors and no 10 percent tolerance. Those existed only to measure the angel tax excess. Their removal confirms on the face of the Rules that the charge has gone.

## What FEMA pricing rules still apply to shares issued to non residents?

An unlisted Indian company cannot issue shares to a person resident outside India below fair value. Rule 21(2)(a) of the NDI Rules requires a valuation by an internationally accepted pricing method on an arm's length basis. A Chartered Accountant, SEBI registered merchant banker or practising cost accountant certifies it. FEMA sets a floor, not a ceiling.

The [NDI Rules](https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083) apply this floor to every issue to a non resident, whatever its route. Paragraph 8.11 of the [Master Direction on Foreign Investment](https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200) limits the certificate's age. It must not be more than 90 days old on the date of the investment.

Convertible instruments carry an extra rule. The Explanation to rule 21(2)(a) requires the price or conversion formula to be fixed upfront at issue. The price at conversion cannot be lower than the fair value at the time of issue. Our guide to [compulsorily convertible instruments](/insights/compulsorily-convertible-debentures-ccd-preference-shares-fdi) covers the formula.

Reporting follows the issue. The company must issue the shares within 60 days of receiving the money, or refund it within the next 15 days. It then files Form FC-GPR within 30 days of the issue. Regulation 4(1) of [FEMA 395/2019-RB](https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0) sets that deadline. Our guides to [FEMA pricing](/insights/fema-pricing-guidelines-share-valuation) and the [FC-GPR timeline](/insights/fc-gpr-filing-timeline-and-process-for-foreign-founders) cover both steps.

With angel tax gone, the FEMA floor is the main price test on an issue to a foreign investor. A high premium is now safe for income tax and fine under FEMA. A low price below the certified value is a FEMA contravention, whatever the commercial reason.

## Do you still need a valuation report?

Yes, often more than one. FEMA needs a fair value certificate for any issue to a non resident. The Companies Act, 2013 needs a registered valuer's report for a preferential issue under section 62(1)(c). Income tax uses rule 57 values for transfers and for receivers of shares. Each test has its own valuer, its own method and its own date.

| Test | Law | When it applies | Who values | Method |
|---|---|---|---|---|
| FEMA floor on issue | Rule 21(2)(a), NDI Rules | Any issue to a non resident | CA, SEBI registered merchant banker or practising cost accountant | Internationally accepted method, arm's length |
| FEMA price on transfer | Rule 21(2)(b) and (c), NDI Rules | Transfer between a resident and a non resident | Same | Same |
| Preferential issue price | Section 62(1)(c), Companies Act, 2013 | Issue to selected persons by special resolution | Registered valuer under section 247 | As the valuer's standards require |
| Receiver of shares below value | Section 92(2)(m), Income Tax Act, 2025 | Anyone receiving shares for less than fair market value | Formula in rule 57 | Adjusted net asset value |
| Seller's deemed consideration | Section 79, Income Tax Act, 2025 | Transfer of unquoted shares below fair market value | Rule 57 formula, on our reading | Adjusted net asset value |

A rights issue offered to existing shareholders in proportion is outside section 62(1)(c). So company law does not need a registered valuer's report for it. FEMA still applies to the non resident's subscription. Our guide to [rights issues to a foreign parent](/insights/rights-issue-indian-subsidiary-foreign-parent) covers that case. A private placement under section 42 follows section 62(1)(c), covered in our note on [private placement to foreign investors](/insights/private-placement-pas-4-foreign-investors).

We often use one valuer to give the FEMA certificate and the registered valuer's report, when the valuer holds both qualifications. The dates must still fit each rule. The FEMA certificate must be within 90 days of the issue. Our [valuation reports service](/services/valuation-reports.html) issues both.

## How does section 92(2)(m) affect investors and founders?

Section 92(2)(m) taxes any person who receives shares for less than fair market value, where the shortfall exceeds INR 50,000. It replaced section 56(2)(x). It looks at the receiver, not the company. It matters most for secondary purchases and for founders or employees who get shares cheaply.

Clause (m)(iii) of [section 92](https://www.incometaxindia.gov.in/w/section-92-113) covers property other than immovable property. Shares are property for this purpose. The fair market value comes from the rule 57 net asset formula. Section 92(3) excludes receipts such as gifts from relatives and transactions not regarded as transfers under section 70(1).

Two situations need care after angel tax:

1. **Secondary purchases.** A buyer acquiring shares from an existing holder below the rule 57 value has income on the shortfall. A non resident buyer from another non resident faces no FEMA price test, so a cheap secondary is possible and taxable.
2. **Fresh issues to insiders.** Tax officers and taxpayers have argued both ways on whether a fresh allotment below value is a "receipt" of property. A non pro rata issue to a founder at face value, while investors pay a premium, carries the highest risk. We document the commercial reason and prefer an issue at or above the rule 57 value.

For most foreign investors subscribing at a premium, section 92(2)(m) does not bite. The investor pays more than the rule 57 value. The clause bites on the other side of the cap table.

When employees or founders receive cheap shares as sweat equity, the section 54 steps are in our guide to [sweat equity shares in India](/insights/sweat-equity-shares-india-companies-act).

## Can the tax officer still question share premium?

Yes, under section 102 of the Income Tax Act, 2025, the successor to section 68. A sum credited in the books without a satisfactory explanation of its nature and source is taxed as income. For a closely held company, a resident shareholder must also explain its own source of the share money.

The [section 102 page](https://www.incometaxindia.gov.in/w/section-102-59) sets the share capital rule in subsection (3). It covers "share application money, share capital, share premium or any such amount, by whatever name called". The extra explanation is required from "the person, being a resident in whose name such credit is recorded". Subsection (4) excludes venture capital funds and companies.

A non resident investor is outside the resident condition in subsection (3). The general test in subsection (1) still applies. The company must show who the investor is, that it could pay, and that the transaction is real. The inward remittance through banking channels, the FIRC or bank advice, the FC-GPR acknowledgement and the investor's financial statements usually answer all three. Our guide to [allotment to a foreign shareholder](/insights/foreign-shareholder-allotment-india-fema-fc-gpr-2026) lists the documents.

## Does transfer pricing apply to shares issued to a foreign parent?

No, on the settled position. In Vodafone India Services Private Limited (Writ Petition No. 871 of 2014, 10 Oct 2014), the Bombay High Court held that an issue of shares is a capital account transaction. It produces no income, so the transfer pricing rules do not apply to the issue price. The Union Cabinet decided to accept that order and not to appeal.

The [release on pmindia.gov.in](https://www.pmindia.gov.in/en/news_updates/acceptance-of-the-order-of-the-high-court-of-bombay-in-the-case-of-vodafone-india-services-private-limited/) records the Cabinet's decision. It also accepted similar rulings in favour of other taxpayers on share issue adjustments. The reasoning rests on the meaning of income, which the 2025 Act did not change. So a subsidiary issuing shares to its parent at a premium or a discount does not face a transfer pricing adjustment on the issue itself.

Transfer pricing still applies to what the subsidiary does with the money. Interest on a loan from the parent, service fees and royalties stay within sections 161 to 173 of the Income Tax Act, 2025.

## What does abolition mean for DPIIT recognised startups?

The Form 2 exemption mattered mainly for angel tax. For share issues from 1 Apr 2024, a startup needs no Form 2 declaration to avoid tax on premium. For earlier issues covered by Form 2, the conditions still bind. A startup that invests in a specified asset within seven years of the old issue loses the exemption for that issue.

Recognition by DPIIT still matters for other reasons, such as government schemes and procurement preferences. A foreign owned startup can be recognised if it meets the DPIIT conditions. Our note on [DPIIT recognition for foreign owned startups](/insights/dpiit-startup-recognition-foreign-owned-startup) covers eligibility, and our [Startup India service](/services/startup-india.html) handles the application.

## What changed, old rules against current rules

The table compares the rules for a closely held company issuing shares to a foreign investor in FY 2023-24 with the rules today.

| Point | FY 2023-24 (AY 2024-25) | From 1 Apr 2024 to 31 Mar 2026 | From 1 Apr 2026 |
|---|---|---|---|
| Tax on premium above fair market value | Taxed under section 56(2)(viib), residents and non residents | Not taxed; clause off from AY 2025-26 | Not taxed; no clause in the 2025 Act |
| Valuation for income tax on issue | Rule 11UA(2): NAV, DCF, five more methods for non residents, price matching, 10% safe harbour | Not needed for the issue | Not needed; rule 57 has no such methods |
| Excluded investors | Notification 29/2023 classes; venture capital and specified funds | Not relevant | Not relevant |
| DPIIT startup exemption | Form 2 with conditions | Not needed for new issues; old conditions bind | Not needed for new issues; old conditions bind |
| FEMA price floor for issue to a non resident | Rule 21(2)(a), fair value | Same | Same |
| Companies Act valuation for preferential issue | Registered valuer, section 62(1)(c) | Same | Same |
| Unexplained share capital | Section 68, 1961 Act | Section 68, 1961 Act | Section 102, 2025 Act |
| Receiver of shares below value | Section 56(2)(x), rule 11UA | Same | Section 92(2)(m), rule 57 |
| Transfer pricing on issue price | Not applicable, Vodafone India Services | Same | Same |
| Reporting | FC-GPR within 30 days | Same | Same |

## What has happened since 17 March 2026?

This page carries a publish date of 17 Mar 2026. On that date the abolition had already applied for two assessment years, and the Income Tax Act, 2025 was due to start. Two events since then complete the picture:

1. **20 Mar 2026.** The Income Tax Rules, 2026 were notified as G.S.R. 198(E). Rule 57 replaced rule 11UA without the share issue valuation methods.
2. **1 Apr 2026.** The Income Tax Act, 2025 came into force. Section 92 has no clause taxing share premium, and section 102 replaced section 68.

We found no clause in section 92, as amended by the Finance Act, 2026, that brings back a charge on share premium.

## What changed in 2026

| Old rule | New rule | Date | Instrument |
|---|---|---|---|
| Section 56(2)(viib), already off from AY 2025-26 | No successor clause | 1 Apr 2026 | Income Tax Act, 2025 |
| Section 56(2)(x) | Section 92(2)(m) | 1 Apr 2026 | Income Tax Act, 2025 |
| Section 68, unexplained cash credits | Section 102, unexplained credits | 1 Apr 2026 | Income Tax Act, 2025 |
| Section 50CA | Section 79 | 1 Apr 2026 | Income Tax Act, 2025 |
| Rule 11UA, including rule 11UA(2) share issue methods | Rule 57, net asset formula only for unquoted equity shares | 1 Apr 2026 | Income Tax Rules, 2026 (G.S.R. 198(E) of 20 Mar 2026) |

The FEMA rules did not change in substance for share issues in 2026. RBI updated the NDI Rules text on its website up to 2 Sep 2026. It updated the Master Direction on Foreign Investment as on 15 Jun 2026.

## Worked example

A US company invests INR 20 crore in an unlisted Indian Private Limited startup. It takes 2,00,000 equity shares of INR 10 each at INR 1,000 per share. The figures are illustrative.

A SEBI registered merchant banker values the shares at INR 800 by discounted cash flow. The rule 57 value is INR 120. The startup is not recognised by DPIIT, and the investor is not in a notified class.

| Item | Issue on 10 Dec 2023 (AY 2024-25) | Issue on 10 Dec 2026 (tax year 2026-27) |
|---|---|---|
| Consideration | 2,00,000 × 1,000 = INR 20,00,00,000 | INR 20,00,00,000 |
| Fair value for the test | INR 800 per share, DCF under rule 11UA(2) | Not relevant for income tax |
| 10% safe harbour | 800 × 110% = INR 880; price of 1,000 exceeds it | Not relevant |
| Excess taxed in the company | (1,000 minus 800) × 2,00,000 = INR 4,00,00,000 | Nil |
| Tax at 25.168% (22% under the old section 115BAA, with 10% surcharge and 4% cess) | INR 1,00,67,200 | Nil |
| FEMA floor | 1,000 is above 800; compliant | 1,000 is above 800; compliant |
| FC-GPR | Within 30 days of issue | Within 30 days of issue |

The December 2023 issue shows the old exposure. The company had a choice of methods for a non resident investor under the amended rule 11UA. A comparable company or option pricing value closer to INR 1,000 could have cut the excess. Price matching with a notified investor within 90 days could have removed it. A loss making company could set the addition off against current year business losses, but not against brought forward business losses. The same issue in December 2026 creates no income tax at all.

A second case shows what still applies. Another US company buys 10,000 shares of the same startup from an existing non resident holder at INR 100 each in December 2026. The rule 57 value is INR 120. FEMA sets no price test between two non residents.

1. The buyer's shortfall is (120 minus 100) × 10,000 = INR 2,00,000. It exceeds INR 50,000, so section 92(2)(m) taxes INR 2,00,000 as the buyer's income.
2. The seller's consideration is deemed to be INR 12,00,000 under section 79, not INR 10,00,000.
3. The buyer must withhold tax on the seller's gain under section 393(2), serial 17.

At INR 120 or more per share, neither section 92(2)(m) nor section 79 would apply.

## Common mistakes

1. **Assuming abolition covers FY 2023-24 rounds.** The clause still applies to AY 2024-25 and earlier. Fix: keep the rule 11UA valuation and price matching evidence for those issues.
2. **Pricing below FEMA fair value because angel tax has gone.** Rule 21 still sets a floor for issues to non residents. Fix: obtain a certificate within 90 days and price at or above it.
3. **Using a stale valuation certificate.** Paragraph 8.11 of the Master Direction limits it to 90 days. Fix: date the certificate close to the allotment.
4. **Skipping the registered valuer for a preferential issue.** Section 62(1)(c) still requires one. Fix: obtain the registered valuer's report before the special resolution.
5. **Ignoring section 102.** Share capital still needs an explained source. Fix: keep remittance proof, FIRC or bank advice, FC-GPR and investor financials on file.
6. **Cheap secondaries between non residents.** No FEMA test applies, but section 92(2)(m) does. Fix: price secondaries at or above the rule 57 value.
7. **Founder shares at face value in a premium round.** The receiver test can apply. Fix: issue founder shares before the premium round or document the commercial basis.
8. **Breaching old Form 2 conditions.** The seven year asset restriction still binds the old issue. Fix: check the specified asset list before buying land, shares or vehicles.
9. **Missing FC-GPR.** The 30 day clock runs from the issue date. Fix: diarise it on the board resolution day.

For FEMA filings on a funding round, see our [funding advisory service](/services/startup-planning-advisory.html).

## Checklist

1. Confirm whether any earlier share issue falls in FY 2023-24 or before, and keep its valuation file.
2. Obtain a FEMA fair value certificate for the new issue, dated within 90 days of allotment.
3. Fix the issue price at or above the FEMA fair value.
4. Obtain a registered valuer's report if the issue is preferential under section 62(1)(c).
5. Pass the board resolution and, for a preferential issue, the special resolution.
6. Collect the investor's KYC, financial statements and source of funds for section 102.
7. Receive the money through banking channels and obtain the FIRC or bank advice.
8. Allot the shares within 60 days of receipt.
9. File Form FC-GPR within 30 days of allotment.
10. File the return of allotment with the Registrar.
11. Check any secondary purchase price against the rule 57 value.
12. Review old DPIIT Form 2 conditions before buying any specified asset.

## Key terms

- **Angel tax (section 56(2)(viib))**: The tax under section 56(2)(viib) of the Income Tax Act, 1961 on a closely held company that issued shares above fair market value. The excess premium was taxed as the company's income from other sources. The Finance (No. 2) Act, 2024 switched it off from AY 2025-26. (https://krystal7.com/glossary#angel-tax-section-56-2-viib)
- **Pricing guidelines (FEMA)**: Rule 21 of the Foreign Exchange Management (Non Debt Instruments) Rules, 2019 sets the price floor and ceiling for unlisted shares. A resident selling to a non resident must receive at least fair value. A non resident selling to a resident may receive at most fair value, certified by a Chartered Accountant, SEBI registered merchant banker or practising cost accountant. (https://krystal7.com/glossary#pricing-guidelines)
- **Form FC-GPR**: The report an Indian company files with the Reserve Bank of India on the FIRMS portal after issuing equity instruments to a person resident outside India. Regulation 4(1) of FEMA 395/2019-RB requires it within 30 days of the issue. The shares must be issued within 60 days of receiving the money, or the money is refunded within 15 days after. (https://krystal7.com/glossary#form-fc-gpr)
- **Registered valuer**: A registered valuer is a person registered under section 247 of the Companies Act, 2013 and the Companies (Registered Valuers and Valuation) Rules, 2017. Rule 13 of the Companies (Share Capital and Debentures) Rules, 2014 needs a registered valuer's report for a preferential allotment, and rule 12(7) of the PAS Rules attaches it to Form PAS-3. (https://krystal7.com/glossary#registered-valuer)
- **Fair market value of unquoted shares (rule 57)**: The value set by rule 57 of the Income Tax Rules, 2026 using an adjusted net asset formula. It replaces rule 11UA. It tests whether a buyer has income under section 92(2)(m) and, on the usual reading, sets the seller's deemed consideration under section 79. (https://krystal7.com/glossary#fair-market-value-of-unquoted-shares-rule-57)
- **Unexplained credits (section 102)**: Section 102 of the Income Tax Act, 2025, which replaced section 68 of the 1961 Act. A sum credited in the books without a satisfactory explanation of its nature and source is taxed as income. For a closely held company, resident shareholders must also explain their share money. (https://krystal7.com/glossary#unexplained-credits-section-102)
- **DPIIT recognised startup**: A company recognised as a startup by the Department for Promotion of Industry and Internal Trade. Under the old angel tax regime, a recognised startup meeting the INR 25 crore and asset conditions could file Form 2 and escape section 56(2)(viib). (https://krystal7.com/glossary#dpiit-recognised-startup)

## Frequently Asked Questions

### Is angel tax abolished in India?

Yes. Section 56(2)(viib) of the Income Tax Act, 1961 does not apply from AY 2025-26, under the Finance (No. 2) Act, 2024. Share premium received from 1 Apr 2024 is not taxed as the company's income. The Income Tax Act, 2025 has no successor clause.

### From which date does the abolition of angel tax apply?

From AY 2025-26, which covers share issues in FY 2024-25 onwards. So premium received on or after 1 Apr 2024 is outside the clause, even though the Budget speech came on 23 Jul 2024. Issues in FY 2023-24 and earlier remain within it for those years.

### Did angel tax apply to foreign investors?

Only for share issues in FY 2023-24. The Finance Act, 2023 extended section 56(2)(viib) to consideration from any person, from AY 2024-25. Before that, only premium from residents was within the clause. From AY 2025-26 the clause stopped applying to all investors.

### Is there angel tax under the Income Tax Act, 2025?

No. Section 92 of the Income Tax Act, 2025 lists income from other sources and has no clause taxing share premium. Rule 57 of the Income Tax Rules, 2026 also dropped the share issue valuation methods of rule 11UA(2). The new Act took effect on 1 Apr 2026.

### Can a tax officer still raise angel tax for old years?

Yes, for AY 2024-25 and earlier. The Finance (No. 2) Act, 2024 switched the clause off only from AY 2025-26. Section 536 of the Income Tax Act, 2025 keeps 1961 Act proceedings alive where consistent. Open assessments and valid reassessments can still apply it.

### Is a FEMA valuation still needed when issuing shares to a foreign investor?

Yes. Rule 21(2)(a) of the NDI Rules bars an issue to a non resident below fair value. A Chartered Accountant, SEBI registered merchant banker or practising cost accountant certifies the value. Paragraph 8.11 of the Master Direction says the certificate must not be more than 90 days old.

### Can an Indian company issue shares to a foreign investor at any premium?

Yes, for income tax and FEMA. FEMA sets a floor at fair value, not a ceiling, for an issue to a non resident. Angel tax no longer taxes the premium. The company must still explain the source of the money under section 102 and report the issue in Form FC-GPR.

### What is section 92(2)(m) of the Income Tax Act, 2025?

It replaced section 56(2)(x) of the 1961 Act. It taxes a person who receives shares or other property for less than fair market value, where the shortfall exceeds INR 50,000. Fair market value for unquoted equity shares comes from rule 57. It taxes the receiver, not the issuing company.

### Does section 102 apply to share capital from non residents?

The general test does. Section 102(1) of the Income Tax Act, 2025 taxes a credit without a satisfactory explanation of its nature and source. The extra rule in section 102(3) asks only resident shareholders of a closely held company to explain their source. Venture capital funds are excluded.

### Does transfer pricing apply to shares issued to a foreign parent?

No. In Vodafone India Services Private Limited (10 Oct 2014), the Bombay High Court held that a share issue is a capital account transaction. It produces no income. The Union Cabinet decided not to appeal. Transfer pricing still applies to loans, fees and royalties between the subsidiary and parent.

### Do DPIIT startups still need to file Form 2?

Not for share issues from 1 Apr 2024, because the clause no longer applies. A startup that filed Form 2 for an earlier issue must still respect the seven year restriction on specified assets. A breach revives the tax on that old issue with a penalty under section 270A.

### Which non resident investors were exempt from angel tax in FY 2023-24?

Notification No. 29/2023 excluded classes such as government bodies, central banks, sovereign wealth funds and regulated entities. It also excluded Category I foreign portfolio investors, endowment funds, pension funds and broad based pooled vehicles from 21 listed countries. DPIIT startups were exempt under Notification No. 30/2023. Check the notification text on the CBDT notifications page before relying on an exclusion.

### Is a registered valuer's report still needed for a preferential issue?

Yes. Section 62(1)(c) of the Companies Act, 2013 requires the price of a preferential issue to be set by a registered valuer's report. Angel tax abolition did not change company law. A rights issue in proportion to existing holdings does not need one under company law.

### What happens if shares are issued to a non resident below fair value?

The issue breaches rule 21 of the NDI Rules, whatever the income tax position. The company would need to compound the contravention with RBI. The investor receiving shares below the rule 57 value can also face tax under section 92(2)(m) on the shortfall.

## Sources

- Income Tax Department, Exemption from angel tax under section 56(2)(viib), https://www.incometaxindia.gov.in/w/exemption-from-angel-tax-section-56-2-viib-
- Ministry of Finance, Budget Speech 2024-25, 23 Jul 2024, paragraph 153, https://www.indiabudget.gov.in/budget2024-25/doc/budget_speech.pdf
- Ministry of Finance, Memorandum explaining the provisions in the Finance (No. 2) Bill, 2024, https://www.indiabudget.gov.in/budget2024-25/doc/memo.pdf
- Income Tax Department, Income Tax Act, 2025, section 92, https://www.incometaxindia.gov.in/w/section-92-113
- Income Tax Department, Income Tax Act, 2025, section 102, https://www.incometaxindia.gov.in/w/section-102-59
- Income Tax Department, Income Tax Act, 2025, section 79, https://www.incometaxindia.gov.in/w/section-79-119
- Income Tax Department, Income Tax Rules, 2026, rule 57, https://www.incometaxindia.gov.in/w/rule-57-4
- Reserve Bank of India, Foreign Exchange Management (Non Debt Instruments) Rules, 2019, updated up to 2 Sep 2026, https://rbi.org.in/scripts/bs_viewcontent.aspx?Id=5083
- Reserve Bank of India, Master Direction on Foreign Investment in India, updated up to 15 Jun 2026, https://www.rbi.org.in/scripts/bs_viewmasdirections.aspx?id=11200
- Reserve Bank of India, Foreign Exchange Management (Mode of Payment and Reporting of Non Debt Instruments) Regulations, 2019, https://rbi.org.in/Scripts/NotificationUser.aspx?Id=11723&Mode=0
- CBDT, Notification No. 30/2023, S.O. 2275(E) of 24 May 2023 (DPIIT startups, with reference to G.S.R. 127(E) of 19 Feb 2019), Gazette of India Extraordinary, https://egazette.gov.in/WriteReadData/2023/246044.pdf
- CBDT, Notification No. 29/2023 of 24 May 2023 and Notification No. 81/2023 of 25 Sep 2023, notifications listing, https://www.incometaxindia.gov.in/notifications
- Prime Minister's Office, Acceptance of the order of the High Court of Bombay in the case of Vodafone India Services Private Limited, 28 Jan 2015, https://www.pmindia.gov.in/en/news_updates/acceptance-of-the-order-of-the-high-court-of-bombay-in-the-case-of-vodafone-india-services-private-limited/

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