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What is angel tax in India - 10 things to know with detail

• Angel tax in India refers to the tax that is levied on the funding received by startups from angel investors. It is aimed at preventing money laundering and ensuring that investments made by angel investors are genuine.
• The angel tax was introduced in the Income Tax Act in 2012, with the intention of curbing the practice of laundering black money through investments in startups.
• Under the angel tax regime, if a startup receives funding at a valuation higher than its fair market value, the excess amount is considered as income and is taxed at the rate of 30%.
• The fair market value of a startup is determined by a tax official based on various factors such as the nature of the business, the industry it operates in, the track record of the startup, and the valuation methods used.
• Startups that are recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) are exempt from angel tax, provided they meet certain criteria such as having a turnover of less than Rs. 25 crores and not being involved in certain specified activities.
• In 2018, the Indian government introduced certain amendments to the angel tax regime to provide relief to startups. These amendments include raising the exemption limit for startups from Rs. 10 crores to Rs. 25 crores and introducing a mechanism for startups to apply for exemption from angel tax.
• Despite these amendments, many startups continue to face challenges with the angel tax regime, as the process of getting exemptions can be cumbersome and time-consuming.
• The angel tax has been a contentious issue in India, with many startups and investors criticizing it for hindering the growth of the startup ecosystem and discouraging angel investments.
• In response to the criticism, the Indian government has taken steps to address the concerns raised by startups and investors, including setting up a dedicated committee to review the angel tax regime and make recommendations for its reform.
• Overall, while the angel tax regime in India is aimed at preventing money laundering and ensuring transparency in the startup ecosystem, it has been criticized for being overly burdensome for startups and investors. Efforts are being made to simplify the process and provide relief to genuine startups.