Angel Tax

"Angel tax" refers to a tax imposed on the funding received by startups from investors, particularly when the investment is considered to exceed the fair market value of the shares. This term originated in India and specifically addresses the income tax levied under Section 56(2)(viib) of the Indian Income Tax Act, 1961.

The concept emerged in 2012 to curb money laundering through high premiums on shares. Under this regulation, if a closely held company (one that is not publicly traded) receives investment at a value higher than the fair market value of its shares, the excess amount is taxed as income from other sources. This tax mainly affects angel investors, who are often crucial for early-stage startups.

While the intention behind the angel tax was to prevent money laundering and protect the integrity of the financial system, it faced criticism for creating hurdles for genuine startup investments. Entrepreneurs and investors argued that valuing startups, especially in their early stages, is subjective and market-driven, making it challenging to determine a "fair" market value. In response to these concerns, the Indian government has made several amendments and provided exemptions for certain recognized startups to foster a more conducive environment for innovation and investment.

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