Angel Tax Exemption — DPIIT / Section 56(2)(viib)

Section 56(2)(viib) of ITA 1961 was abolished by Finance Act 2024 with effect from 1 April 2025 (AY 2026-27 onwards). Equity or CCPS issued at a premium to any investor — domestic or foreign — on or after 1 April 2025 carries zero angel tax exposure. However, if your company received investment before that date and received a scrutiny notice or assessment order, those proceedings continue under the old law and must be defended using Rule 11UA FMV methodology and, where applicable, the DPIIT Form 2 exemption.

For pre-April 2025 issuances still under assessment, the primary defences under Section 56(2)(viib) ITA 1961 are: (1) DPIIT recognition plus Form 2 filing under the DPIIT Notification dated 24 May 2018 — this grants a complete exemption if the startup met the eligibility conditions at the time; (2) Rule 11UA(2) FMV report by a CA showing the issue price did not exceed FMV under the DCF or NAV method; (3) for non-resident investors post-Finance Act 2023, internationally accepted valuation methods (OPM, PWERM) were permissible under Rule 11UA(2)(b). Harun Raaj and Associates prepares the FMV report, drafts the submission, and appears before the Assessing Officer.

Yes. DPIIT recognition (valid for 10 years from incorporation, under the DPIIT Notification dated 19 February 2019) unlocks two live tax benefits: Section 80-IAC ITA 1961 provides a 100% profit deduction for any 3 consecutive years out of the first 10 years, subject to CBDT inter-ministerial board approval; and Section 79 ITA 1961 exempts eligible startups from the normal rule that bars loss carry-forward when more than 51% of shareholding changes — allowing continued use of accumulated losses through funding rounds.

Section 56(2)(x) ITA 1961 taxes a recipient individual or HUF who receives shares without adequate consideration — the difference between FMV and consideration paid is taxable as income from other sources. This section applies to investor-individuals receiving shares; it does not apply to companies or SEBI-registered AIF or VCF funds. An opinion from us would confirm: (a) whether the investor falls within the charging scope; (b) whether the consideration paid meets Rule 11UA FMV; and (c) structuring options to ensure clean tax treatment at the investor level.

A recognised startup must: (1) file the annual self-certification on the Startup India portal confirming continued eligibility (turnover not exceeding INR 100 crore, entity not older than 10 years from incorporation); (2) file its ITR under Section 139 ITA 1961 (Section 263 ITA 2025 for TY 2026-27) on time — late filing triggers Section 234F fees and may jeopardise the Section 80-IAC deduction; (3) get accounts audited under Section 44AB ITA 1961 (Section 63 ITA 2025) once turnover exceeds INR 1 crore. We provide a compliance calendar tied to your DPIIT recognition date.