What is ‘Angel Tax’?

  • Blog|Income Tax|
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  • By Taxmann
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  • Last Updated on 1 March, 2022

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What is ‘Angel Tax’?

The Finance Act, 2012 introduced a new clause (viib) in Section 56(2) in Income-tax Act which is popularly known as ‘Angel Tax’. This provision was introduced to tax the closely held companies (i.e., Private Companies) which receive excessive premium from issue of shares.
The deeming fiction of Section 56(2)(viib) is attracted when a closely held company receives consideration from a resident person for issue of shares and it exceeds the face value of such shares. If shares are issued at face value, this provision shall not be applicable.
If this provision is triggered, the aggregate consideration received from issue of such shares as exceeds its fair market value shall be charged to tax under the head ‘Income from other sources’. However, this provision doesn’t apply if consideration for issue of shares is received by a company from a class or classes of persons as may be notified by the Central Government in this behalf.
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In order to provide some relief to the genuine assessees many notification were issued in this regard. The latest notification has been issued on February 19, 2019, which has provided relief to small start-ups subject to various conditions.
 
As per the latest notification issued by DPIIT (Department for Promotion of Industry and Internal Trade) norms of levy of angel tax has been relaxed. One of the major amendment is status of ‘Eligible Start-up’ has been extended for 3 more years i.e. upto 10 years. This notification has relaxed the levy of tax subject to certain conditions.
 
One of the most important condition for claiming exemption under section 56(2)(viib) is that it’s paid up share capital along with securities premium should not exceed Rs. 25 crores. While computing the limit of Rs. 25 crores, consideration received from Non-residents, Venture Capital Company & some other specified companies are to be excluded.  
 
This benefit is available irrespective of the date of issue of shares. However it cannot be claimed in respect of the shares in regard to which assessment order for levy of angel tax has already been issued.
 
Earlier start-ups were needed to file an application to DPIIT for claiming exemption under section 56 which was further to be processed by CBDT. However, this requirement has been done away, now only a self-declaration is required to be filed with DPIIT for the same.
 
Where an eligible start-up, which is granted exemption from this tax doesn’t comply with the conditions subject to which exemption was granted, such benefit shall be revoked from retrospective effect.
 

Also Read: When Angel tax is levied?

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