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Angel Tax Under Section 56(2)(viib) of Income Tax Act
Angel Tax under Section 56(2)(viib) of the Income Tax Act, 1961, is in the news in the context of a document stating that angel tax has been abolished for all classes of investors. The provision relates to taxation on capital raised by unlisted companies through share issues when the issue price exceeds the company’s fair market value.
Angel Tax under Section 56(2)(viib) of the Income Tax Act, 1961
| Dimension | Key Details |
|---|---|
| Legal basis | Derives its genesis from Section 56(2)(viib) of the Income Tax Act, 1961. |
| Applicability trigger | Is levied on capital raised via the issue of shares by unlisted companies from an Indian investor if the share price is seen in excess of the fair market value of the company. |
| Tax treatment | The excess funds raised at prices above fair market value are treated as income, on which tax is levied. |
| Year of introduction | Is first introduced in 2012. |
| Stated rationale at introduction | Is introduced to prevent black money laundering through share sales. |
| Tax rate mentioned | Is levied at a rate of 30.9% on net investments in excess of the fair market value. |
| Startup exemption announcement | The government has announced an exemption from angel tax for startups in 2019 on fulfillment of certain conditions. |
| Startup exemption conditions | Requires: DPIIT recognition as an eligible startup; aggregate paid-up share capital and share premium not more than ₹25 crores; this amount does not include money raised from Non-Resident Indians (NRIs), Venture Capital Firms, and specified companies. |
| Angel investor exemption provision | For angel investors, the amount of investment that exceeds the fair market value can be claimed for a 100% tax exemption, subject to eligibility conditions. |
| Angel investor eligibility conditions | Mandates that the investor has a net worth of ₹2 crores or an income of more than ₹25 lakh in the past 3 fiscal years. |
| Venture capital funds (definition) | Venture capital funds are pooled investment funds that manage the money of investors who seek private equity stakes in startups and small- to medium-sized enterprises with strong growth potential. |
| Venture capital investments (risk-return characterisation) | These investments are generally characterized as very high-risk/high-return opportunities. |