What is angel tax under Section 56(2)(viib)?

When an unlisted company issues shares to an investor at a price above their Fair Market Value (FMV), the excess (share premium) is treated as income from other sources and taxed at ~30%. This is colloquially called 'angel tax'.

Are DPIIT-recognised startups exempt from angel tax?

Yes. DPIIT-recognised startups are fully exempt from Section 56(2)(viib), provided they file the required declaration. The exemption applies to all share issuances, regardless of the premium over FMV.

How is FMV determined for angel tax purposes?

FMV is determined using either the Net Asset Value (NAV) method or the Discounted Cash Flow (DCF) method. A Category I merchant banker typically does the DCF valuation. DPIIT startups are exempt regardless, but non-DPIIT startups should get a proper valuation to minimise tax exposure.

Who actually pays angel tax, the startup or the investor?

The startup company pays it, not the investor. Under Section 56(2)(viib) the share premium (the amount the issue price exceeds fair market value) is treated as the company's income from other sources and taxed at the company's hands, so a large premium can create a surprise tax bill for the founders rather than the angel.

How does this calculator work out the angel tax?

It takes your premium per share (issue price minus FMV), multiplies it by the number of shares issued (investment divided by issue price) to get the total taxable premium, then applies a 30% rate. The result excludes surcharge and cess for simplicity, so the real liability for a non-DPIIT startup would be slightly higher.

Does angel tax apply if I issue shares at or below FMV?

No. Angel tax only bites on the premium above fair market value, so if your issue price is equal to or below FMV there is no premium component and no tax, regardless of DPIIT status. This is why getting a defensible DCF valuation matters most for non-DPIIT startups raising at a high price.

Are foreign and institutional investors treated differently for angel tax?

Shares issued to certain specified entities such as SEBI-registered venture capital funds, Category I and II AIFs, and banks are exempt from angel tax. Rules around non-resident investors have changed in recent years, so the treatment of foreign money is fact-specific and you should confirm the current position with a tax advisor before closing the round.

What declaration do I need to file to claim the DPIIT angel tax exemption?

A DPIIT-recognised startup must file the prescribed declaration (commonly referred to as Form II) declaring that it meets the exemption conditions under Section 56(2)(viib). The exemption is not automatic just from being recognised; without this declaration on record the relief can be questioned, so file it before or around the time you issue the shares.

Angel Tax Calculator (Section 56)

See whether your funding round triggers Section 56(2)(viib) angel tax — the premium between issue price and FMV, the estimated tax, and whether DPIIT registration exempts you.

Total investment received

₹

Total amount the investor is putting in.

₹50 lakhs

Issue price per share

₹

The price per share at which shares are being issued to the investor.

₹150

Fair Market Value (FMV) per share

₹

FMV determined by a merchant banker or DCF method. DPIIT startups can issue at FMV without triggering tax.

₹100

DPIIT-recognised startup?

DPIIT-recognised startups are exempt from angel tax under Section 56(2)(viib).

Share premium per share₹50

Total premium on investment₹16,66,650

Angel tax liability

Exempt (DPIIT)

DPIIT-recognised startups are fully exempt from Section 56(2)(viib) angel tax.

This premium would normally be taxable, but DPIIT registration exempts it.

Estimates only — not financial, tax or legal advice. Figures vary by state, capital and individual circumstances.

How to use this calculator

Enter four numbers to check if your funding round triggers angel tax — and whether DPIIT registration protects you.

1
Enter the total investment. The full amount the investor is putting into your company.
2
Enter issue price and FMV. The price per share you're issuing to the investor, and the fair market value determined by a merchant banker or DCF method.
3
Select DPIIT status. If your startup is DPIIT-recognised, you're exempt from angel tax on the premium amount.
4
Read your position. See whether angel tax applies, the premium amount, and the estimated tax liability.

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What is angel tax?

Angel tax is the colloquial name for Section 56(2)(viib) of the Income Tax Act. It applies when an unlisted company — typically a startup — issues shares to an investor at a price above their fair market value (FMV). The difference, called the share premium, is treated as 'income from other sources' and taxed at the applicable corporate rate.

The tax is paid by the COMPANY, not the investor. The startup owes income tax on the premium portion of the investment.

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DPIIT exemption — the startup relief

DPIIT-recognised startups are fully exempt from angel tax, provided they have filed the required declaration with the DPIIT. This exemption was introduced specifically to prevent the tax from discouraging angel investment into genuine startups. A DPIIT startup can issue shares at any premium to any investor without triggering Section 56(2)(viib).

Non-DPIIT startups are still liable. The FMV is typically determined using the DCF (Discounted Cash Flow) method by a Category I merchant banker. Any premium over that FMV is taxable.

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How is FMV determined?

The Income Tax Rules prescribe two methods for determining FMV of unquoted shares:

Net Asset Value (NAV) method: Based on the company's book value — assets minus liabilities. Usually gives a lower valuation for early-stage startups with few assets.
Discounted Cash Flow (DCF) method: Projects future cash flows and discounts them to present value. More relevant for high-growth startups — and generally gives a higher FMV, reducing the potential tax exposure.

For DPIIT-recognised startups, the exemption applies regardless of which method is used. For others, getting a proper DCF valuation from a Category I merchant banker is critical to minimise the angel tax exposure.

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How the tax is calculated

The tax is 30% of the premium amount (plus applicable surcharge and cess). Here is an example:

A non-DPIIT startup raises ₹5 Cr at ₹150/share. FMV per share is ₹100:

Investment: ₹5,00,00,000
Issue price / share: ₹150
FMV / share: ₹100
Premium / share: ₹50
Shares issued: 33,333

Total premium = ₹50 × 33,333 = ₹16,66,667. Tax at 30% = ~₹5,00,000 plus surcharge and cess.

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When angel tax does not apply

DPIIT-recognised startups are fully exempt — the most common relief.
Shares issued to certain specified entities (SEBI-registered VCs, AIFs, banks, etc.) are exempt.
Shares issued at or below FMV have no premium component and no tax.
Startups that have filed the required DPIIT Form II — 'Declaration of Angel Tax Exemption' — are covered.

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