In India’s evolving startup ecosystem, the term “Angel Tax” continues to spark confusion, concern, and heated debate. While the government has made several attempts to reform and clarify its application, Chartered Accountants today play a critical role in guiding startups through this complex taxation maze. As we step into the financial year 2025–26, it’s vital for both entrepreneurs and CAs to understand how the Angel Tax is being implemented and what practical strategies can help avoid litigation and cash flow hurdles.
Angel Tax, introduced under Section 56(2)(viib) of the Income Tax Act, was originally aimed at curbing the inflow of unaccounted money disguised as capital. It taxed the amount received by closely held companies when shares were issued at a price higher than their fair market value (FMV). The excess over FMV was treated as income from other sources and taxed accordingly. The law, however, unintentionally impacted genuine angel investments in early-stage startups—often from friends, family, or angel investors—thus throttling innovation and fundraising.
Over the years, the government has responded to industry concerns with regulatory relaxations. DPIIT (Department for Promotion of Industry and Internal Trade) recognition for startups, exemption certificates, and updated CBDT notifications have created some breathing room. But the confusion hasn’t completely gone away. Especially in recent months, with the inclusion of foreign investors under the Angel Tax regime effective from April 1, 2024, many startups and their financial advisors are once again on high alert.
What makes Angel Tax compliance tricky in 2025 is not just the valuation mechanism but also the increased scrutiny on the source and valuation of foreign funds. The valuation now must align with Rule 11UA, using either the Discounted Cash Flow (DCF) method or Net Asset Value (NAV) method—both requiring meticulous documentation. Here’s where the CA becomes the startup’s most trusted ally, balancing compliance with business practicality.
For CAs, it’s no longer just about filing returns or issuing valuation reports. It’s about understanding the business model, advising on optimal share structuring, assisting with DPIIT registration, and ensuring every capital infusion is transparently backed by verifiable documentation. Failure to do so could result in startups receiving unwelcome tax notices under Section 148A, disrupting operations and investor confidence.
Startups must also be advised on how to prepare their financials to withstand scrutiny. Bookkeeping must reflect accurate cash flows and investor funds. Communication with investors must be proactive and clear—especially when dealing with foreign investors who may be unaware of the Indian Angel Tax framework. This new responsibility makes the CA not just a financial expert, but a strategic consultant essential to a startup’s survival.
As India continues its journey to becoming a global innovation hub, ensuring tax policies like Angel Tax do not hinder early-stage capital is crucial. Chartered Accountants stand at the intersection of law, policy, and entrepreneurship, guiding the next generation of startups not just to survive tax complexity—but to thrive despite it.
