Angel Tax Is Gone: Do Indian Startups Still Need a Valuation Report?
The abolition of angel tax under Section 56(2)(viib) for domestic investors from FY 2024-25 has led some founders to assume that valuation reports are no longer necessary for fundraising.
That assumption is not entirely correct.The abolition removed a specific tax provision applicable to certain share issuances. It did not eliminate the other regulatory, accounting, tax, and commercial circumstances in which a startup may need to establish the fair value of its shares.
What Did the Abolition of Angel Tax Actually Change?
Under the earlier provisions, when a company issued shares to a domestic investor at a price higher than their fair market value, the excess could be treated as taxable income in the hands of the company.From FY 2024-25, this specific angel tax provision no longer applies to domestic investors.
However, the removal of this provision does not mean that valuation requirements have been eliminated altogether. Angel tax was only one of several circumstances in which a company may need to determine and document the fair value of its shares.
Several other requirements continue to apply:
1. Foreign Investment Still Requires Compliance With FEMA Pricing Rules
If a funding round includes a foreign investor, the applicable FEMA pricing requirements continue to apply. The issue price of shares issued to a person resident outside India must comply with the prescribed fair value requirements, with the valuation generally certified by a SEBI-registered merchant banker or a chartered accountant, as applicable.
These requirements are separate from Section 56(2)(viib). Therefore, the abolition of angel tax does not remove the valuation requirements applicable to foreign investment.
2. Other Income-Tax Provisions Continue to Make Valuation Relevant
Angel tax was not the only provision under the Income-tax framework where the fair value of shares could have tax implications. Certain transactions involving the issue or transfer of shares below fair market value can continue to have tax consequences for the parties involved. For example, specific provisions may require fair market value to be considered when determining taxable income or capital gains in applicable transactions involving unquoted shares.
Accordingly, a defensible fair market value may still be necessary even when Section 56(2)(viib) is no longer relevant.
3. ESOPs Still Require Appropriate Valuation
Employee stock options are another area where valuation remains important. Companies granting ESOPs need to determine the appropriate value of their underlying equity instruments for accounting and compliance purposes. For companies applying Ind AS, the requirements under Ind AS 102 make the valuation of equity-settled share-based payments an important consideration.
This requirement is entirely separate from angel tax.A well-supported valuation can also become particularly important during subsequent fundraising, audits, or due diligence, when investors may review how earlier equity awards were valued and priced.
4. Certain Transactions Under the Companies Act Still Require Valuation
The Companies Act, 2013 contains separate valuation requirements for certain corporate transactions. Depending on the nature of the transaction, valuation by a Registered Valuer may be required for transactions such as mergers, arrangements, buybacks, and other specified corporate actions. These requirements arise under company law rather than the Income-tax Act. The abolition of angel tax therefore has no bearing on these obligations.
5. Investors May Still Require a Valuation
Even where a valuation report is not specifically mandated by law, there can be sound commercial reasons for obtaining one. Institutional investors may seek a clear and supportable basis for the proposed share price as part of their investment and due diligence process. A valuation report can also provide useful documentation for future fundraising, audits, acquisitions, or other transactions.
A company that decides not to obtain a valuation solely because angel tax has been abolished may subsequently need to explain how its share price was determined when the transaction is reviewed at a later stage.
What Has Actually Changed?
The change following the abolition of Section 56(2)(viib) is significant, but it is more limited than it is sometimes perceived to be. For a purely domestic funding round where no other valuation requirement applies, the company no longer faces the specific angel tax concern associated with issuing shares above fair market value. This can simplify the valuation process for certain transactions.
However, it should not be interpreted as a blanket exemption from obtaining a valuation. FEMA pricing requirements for foreign investment continue to apply. Other tax provisions can still make fair market value relevant. ESOP accounting continues to require appropriate valuation, and certain transactions under the Companies Act continue to require valuation by a Registered Valuer.
Therefore, before concluding that a funding round does not require a valuation report, companies should consider the broader regulatory and commercial context rather than focusing solely on the abolition of angel tax.
The key question is no longer simply whether angel tax applies. It is whether any other tax, FEMA, accounting, company law, or transaction-specific requirement makes a valuation necessary.
