The Angel Tax exemption framework under the Direct Tax Code (DTC) 2025 is a critical compliance area for startups raising capital from angel investors. Understanding the documentation requirements and conditions for exemption is essential for startups seeking to avoid tax on premium received on issue of shares. This guide provides practical guidance on what startups actually need to document.
The Angel Tax Framework Under the DTC
Section 92(2)(m)(ii) — Income from Immovable Property Without Consideration
Section 92(2)(m)(ii) of the DTC provides that where any person receives in any tax year, from any person or persons, any immovable property:
- Without consideration, the stamp duty value of which exceeds ₹50,000, the stamp duty value of such property
- For a consideration, the stamp duty value of such property that exceeds such consideration, if this excess amount is more than the higher of ₹50,000 or 10% of the consideration
Section 92(2)(m)(iii) — Income from Property Other Than Immovable Property
Section 92(2)(m)(iii) provides that where any person receives any property, other than immovable property:
- Without consideration, the aggregate fair market value of which exceeds ₹50,000, the whole of the aggregate fair market value
- For a consideration which is less than the aggregate fair market value by an amount exceeding ₹50,000, the aggregate fair market value as exceeds such consideration
Section 92(3) — Exceptions
Section 92(3) provides that the provisions of Section 92(2)(m) shall not apply to any sum of money or any property received:
- From any relative
- On the occasion of marriage of the individual
- Under a will or by way of inheritance
- In contemplation of death of the payer or donor
- From any local authority
- From or by any registered non-profit organisation (except when received by certain persons)
- By way of a transaction not regarded as transfer under Section 70(1)(a), (c), (d), (e), (f), (g), (i), (j), (k), (l), (n), (o), (t), (u), (v) or (w)
- From an individual by a trust created or established solely for the benefit of relative of the individual
- From such class of persons and subject to such conditions, as may be prescribed
Section 92(5) — Definition of Relative
Section 92(5)(g) defines "relative" for the purposes of Section 92. In case of an individual, "relative" means:
- Spouse
- Brother or sister
- Brother or sister of the spouse
- Brother or sister of either of the parents
- Any lineal ascendant (maternal as well as paternal) or descendant
- Any lineal ascendant (maternal as well as paternal) or descendant of the spouse
- Spouse of the person referred to in items (B) to (F)
For a Hindu undivided family, "relative" means any member thereof.
Schedule III (Table: Sl. No. 22) — Local Authority Exception
Schedule III (Table: Sl. No. 22) provides that income which is chargeable under the head "Income from house property", "Capital gains" or "Income from other sources" or from a trade or business of any local authority shall not be included in total income. Income from trade or business is eligible for exclusion if such income accrues or arises from the supply of a commodity or service (not being water or electricity) within its own jurisdictional area, or water or electricity within or outside its own jurisdictional area.
Conditions for Angel Tax Exemption for Startups
Eligible Startups
Under Section 92(3)(i), the provisions of Section 92(2)(m) shall not apply to such class of persons and subject to such conditions, as may be prescribed. For startups, the conditions are that the startup must be recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) and must have a valid certificate of recognition.
Key Conditions
- The startup must be recognised by DPIIT
- The startup must have a valid certificate of recognition
- The aggregate amount of paid-up share capital and share premium of the startup after the issue or proposed issue of shares does not exceed ₹25 crore
- The startup has not invested in any of the following: building or land, motor vehicle (other than for business), loans and advances (other than for business), capital contribution to other entities, shares and securities, jewellery, art, or any other asset not directly related to the business
Startups Not Eligible
Startups that have invested in specified assets are not eligible for the angel tax exemption. These include investments in:
- Building or land (other than for business)
- Motor vehicle (other than for business)
- Loans and advances (other than for business)
- Capital contribution to other entities
- Shares and securities
- Jewellery, art, or any other asset not directly related to the business
Documentation Requirements
1. DPIIT Recognition Certificate
The startup must maintain a valid DPIIT recognition certificate. This is the primary document establishing eligibility for the angel tax exemption.
Document to Maintain:
- Copy of DPIIT recognition certificate
- Evidence that the certificate is valid and current
2. Valuation Report
The valuation of shares issued to angel investors must be documented. The valuation must be done by a merchant banker or a chartered accountant.
Document to Maintain:
- Valuation report from a merchant banker or chartered accountant
- The report must justify the valuation method used
- The report must be dated on or before the date of issue of shares
3. Investment Documents
All investment documents must be maintained.
Document to Maintain:
- Share subscription agreements
- Shareholders' agreements
- Board resolutions approving the issue of shares
- Share certificates issued to investors
- Proof of receipt of funds from investors
4. Investor Due Diligence
Due diligence on investors must be documented.
Document to Maintain:
- PAN of investors
- Income tax returns of investors (for the relevant years)
- Bank statements showing source of funds
- Affidavit from investors regarding their financial capacity
- Declaration from investors that they are not acting on behalf of any undisclosed person
5. Startup's Balance Sheet
The startup's balance sheet must demonstrate that the aggregate amount of paid-up share capital and share premium does not exceed ₹25 crore after the issue of shares.
Document to Maintain:
- Audited balance sheet after the issue of shares
- Statement showing the aggregate amount of paid-up share capital and share premium
6. Compliance with Investment Restrictions
The startup must demonstrate that it has not invested in prohibited assets.
Document to Maintain:
- Balance sheet showing investments
- Declaration regarding the use of funds
- Evidence that funds have been used for business purposes
7. Filing of Form 56
Form 56 must be filed with the income-tax authorities to claim the angel tax exemption.
Document to Maintain:
- Copy of Form 56 filed with the income-tax authorities
- Acknowledgement of filing
Practical Compliance
1. Obtain DPIIT Recognition
Ensure the startup is recognised by DPIIT and has a valid certificate of recognition. DPIIT recognition is the foundation of the angel tax exemption.
2. Get a Valuation Report
Obtain a valuation report from a merchant banker or chartered accountant. The valuation must be done on or before the date of issue of shares.
3. Maintain Complete Investment Documentation
Maintain complete documentation of the investment, including share subscription agreements, shareholders' agreements, and proof of receipt of funds.
4. Conduct Investor Due Diligence
Conduct due diligence on investors to ensure they are genuine and have the financial capacity to invest.
5. Ensure Compliance with Investment Restrictions
Ensure that the startup does not invest in prohibited assets. If the startup has invested in such assets, the angel tax exemption may not be available.
6. File Form 56
File Form 56 with the income-tax authorities to claim the angel tax exemption. The form must be filed within the prescribed time.
7. Maintain Proper Books of Account
Maintain proper books of account as required under Rule 46 of the Income-tax Rules, 2026.
Consequences of Non-Compliance
Tax on Premium Received
If the angel tax exemption is not available, the premium received on issue of shares may be treated as income under Section 92(2)(m)(iii) and taxed at the rate applicable to the startup. The tax is calculated on the aggregate fair market value of shares issued as exceeds the consideration received.
Interest and Penalty
Non-compliance may also result in:
- Interest on tax shortfall
- Penalty for incorrect claim
- Prosecution in cases of wilful default
Expert Legal Guidance
Anuj Desai & Associates provides comprehensive legal advisory services on angel tax exemption for startups. Our direct tax experts help startups understand the exemption conditions, prepare documentation, and navigate the regulatory framework. We assist in DPIIT recognition, valuation report preparation, and representation before income-tax authorities.
Disclaimer: This article provides general information and does not constitute legal advice. For specific guidance on angel tax exemption or any other direct tax matter, please consult qualified legal professionals.
Need Expert Legal Guidance?
Navigating the complex angel tax exemption framework requires experienced legal counsel. At Anuj Desai & Associates, we provide comprehensive direct tax advisory services, including:
- DPIIT Recognition: Assistance with DPIIT recognition
- Documentation: Assistance with angel tax documentation
- Form 56 Filing: Assistance with Form 56 filing
- Representation: Representation before income-tax authorities
Contact us for expert legal guidance on your angel tax matters.