Angel Tax Exemption — DPIIT / Section 56(2)(viib)

Section 56(2)(viib) of the Income-tax Act 1961 treated the excess of the issue price over the fair market value of shares as income from other sources when an unlisted company issued shares at a premium. It applied to companies in which the public were not substantially interested — in practice, the private and unlisted companies founders raise from angels.

The provision carried a built-in defence: if the company could show the issue price equalled fair market value computed under Rule 11UA, there was no deemed income at all.

The Finance (No. 2) Act 2024 omitted s.56(2)(viib) with effect from 1 April 2025. A company that raises a round after that date faces no angel tax exposure on the premium, and the startup exemption machinery is no longer needed for new issues.

The change is prospective. Scrutiny and notices for issues made in AY 2017-18 through 2024-25 continue to run under the old law, and a company must still answer them with the same valuation and exemption arguments.

For the years the provision applied, two defences decided most outcomes. The first was the DPIIT startup exemption under the proviso to s.56(2)(viib); the second was a properly documented Rule 11UA valuation showing the premium was justified.

Both defences are fact-heavy: the startup exemption turns on recognition status and the ₹25 crore cap, while the valuation defence turns on projections and book values that survive scrutiny.