What is Angel Tax?
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The Income Tax Act of 1961’s Section 56(2)(viib) discusses the concept of angel tax. According to the Finance Act, 2012, in the IT Act, every startup (i.e., unlisted companies whose shares are not available for buying on the stock market) that receives funding from an angel investor must contribute a certain amount to the government.This tax comes into play if the total investment value exceeds the company’s FMV or Fair Market Value. Investment greater than FMV is categorised as “income from other sources”, and the tax imposed on it is called angel tax.Angel tax is the tax paid by unlisted companies on gaining funding from angel investors through issuing shares. The angel tax is levied at the rate of 30% in India, and an additional cess of 3% is also applicable to it as per section 56(2)(vii)(b) of the Income Tax Act,1961. The effective rate of the angel tax is 30.9%.