Angel Tax: Section 56(2)(viib) and Exemptions

The most feared provision in startup funding. When a startup raises money from an angel investor at a valuation higher than the "Fair Market Value" computed by the tax department, the premium is taxed as income in the startup's hands, even though it is investment capital. A ₹1Cr raise can generate a ₹30-40L tax demand. DPIIT recognition is the primary shield.

How angel tax hits in practice: Startup valued at ₹5Cr by angel investor. Angel invests ₹50L for 1% equity. Revenue at time of investment: ₹20L. DCF FMV computed by CBDT: ₹1.5Cr (based on your current numbers). Angel tax: (₹50L investment − FMV proportion) = notional premium of ₹35L. Tax at 30%: ₹10.5L. The startup just paid ₹10.5L tax on money raised, before spending a single rupee on growth. DPIIT recognition is the cleanest solution: Apply BEFORE raising money. Takes 2 days. Free. On recognition: Sec 56(2)(viib) does not apply if investor is a resident individual and the startup satisfies the recognition criteria. No angel tax, no FMV calculation needed. Period. If already received investment and don't have recognition: Get a chartered accountant to compute FMV using DCF method NOW, document it. If FMV ≥ investment amount: no angel tax exposure.