Introduction

Startups need money to grow and sustain. They usually get investments from angel investors. But the money they get from angel investors is subject to angel tax, which means it’s not tax-exempt. In this blog, we have explained what angel tax is and will give you all the details you need to understand it better.

Who are Angel Investors?

Angel Investors offer seed money to start-ups in exchange for an equity stake in the venture if the idea is successful. Angel investing can therefore make available financing to entrepreneurs who either cannot or do not want to use traditional financing methods such as bank loans.

This means that each investment constitutes just a small portion of an angel’s investment portfolio. The particular courage and vision displayed by these investors are thus emphasised in this context. An angel investor may be hands-off or deeply involved, bringing an idea through development and to the market.

What is Angel Tax?

Startups need capital to run. Since they do not own any physical assets that can be mortgaged, they seek capital investment from angel investors, who provide funds in return for a percentage of the ownership of the company. Whenever a startup falls into distress or when things are not working out regarding money matters, the angel investor injects money into it.

Angel tax is the tax on a start-up that raises funds from angel investors. This tax is levied when the investment raised exceeds the company’s Fair Market Value (FMV). Investments over and above the Fair Market Value are income from other sources; tax paid over it is termed as angel tax.

The primary objective of the angel tax is to stop money laundering. Keeping in mind this motive, the Income Tax department thought about the method of taxing private companies on excessive share premiums received above FMV to counter the generation of black money in India.

The provisions for the Angel tax in India were removed from the financial year (FY) 2025-26 as announced in the Union Budget 2024-25, i.e. from the FY 2025-26 angel tax in India for all types of investors is abolished.

Angel Tax rate in India and example

The current Angel tax rate in India is 30.9 % for companies.

When businesses raise capital at a valuation more than the fair market value, the amount in excess is termed ‘Income from Other Sources’ and attracts angel tax.

Let me give you an example so that you understand what the angel tax is. Assume that an angel investor is investing Rs 15 crores in a company, and the total FMV or the fair market valuation of shares issued is Rs 10 crores. So, the remaining Rs 5 crores will come as excess money and be taxed at the rate of 30.9%.

Exemption from Angel tax in India

Earlier the angel tax was charged fully under Section 56(2)(vii)(b). However, the government has come up with some conditions whereby an investor is exempted from paying the angel tax. They are as follows:

a) The Department of Promotion of Industry and Internal Trade (DPIIT) must have issued a recognition to the start-up.

b) Total paid-up capital of the start-up should not exceed Rs 25 crores.

c) A certified merchant banker shall determine the valuation and fair market value.

d) Start-ups shall not make investments in jewels, land, buildings, capital investment in other organisation, transportation cost that exceeds Rs 10 lakh, or loan advancements.

How do you go ahead for approaching an Angel Investor?

Approaching angel investors in India can be challenging. However, there are some things that you can do to increase your chances of success. Here are a few ways you should approach angel investors in India:

1. Present a strong business plan

Generally, before approaching angel investors, one must have a proper business plan. This should outline the product or service you are offering, your target market, business model, financial projections, and marketing strategy. The document is supposed to be research-based, such that it shows an understanding of your industry and competition.

2. Network

Network with angel investors in India. Attend startup events, meetups, and conferences. It is a great way to meet potential investors as well as other fellow entrepreneurs from the same industry. Additionally, there are plenty of online communities like LinkedIn groups from where you can connect with investors and relevant industry experts.

3. Referrals

Referral by industry experts, advisors, or other investors: It may easily catch the eye of the angel investor in India if these referrals come from industry experts, advisors, or other investors. Look for advisors that may lead you to prospective investors and give recommendations on how you can present your business plan.

4. Concise and crystallized

Needless to say, if pitching to angel investors, be clear and concise about your business plan and investment opportunity. Investors hear thousands of pitches, so make sure to make a great first impression and get to the point of your pitch with brevity and urgency.

5. Highlight your team

While approaching investors in India, speak of strength and experience in your team. Investors want to see that they can execute the business plan with a complete set of skills and expertise. Let people know about the qualifications, experience, and good achieved by your team to create an impressive impact.

Frequently Asked Questions (FAQs)

Which section of the Income Tax Act, 1961 of India specifies the angel tax rate?

Section 56(2) (vii) (b) Income Tax, IT has stated an Angel tax rate at 30.9%.

What’s the new status of Angel tax in Union Budget 2024-25?

The Union Budget 2024-25 removes angel tax, which will be effective from the FY 2025-2026.

What is the criteria if the paid-up capital of a startup requires angel tax exemption for FY 2024-25?

To enjoy exemption from the angel tax in FY 2024-25, the startup has to have paid-up capital of not less than Rs. 25 crores.

What is Fair Market Value?

Fair market value refers to the value of a good or service for which a reasonable willing buyer and a reasonable willing seller, both having reasonable knowledge about relevant facts, would mutually agree to the transaction.

Name a few of the best angel investors in India.

Some of the top angel investors in India are Kunal Shah, Ramakant Sharma, Anupam Mittal, Rajan Anandan, Kunal Bahl, Rohit Bansal, Binny Bansal, and Jitendra Gupta.

Name some sources to get hold of the Angel investors.

Angel Investors can be found through networks like Angel Investment network, LinkedIn; online platforms like Angel List; local business groups, schools, or organisations, etc.

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