Generally speaking, "angel tax" refers to a tax on capital raised by unlisted corporations from any individual against the issuance of shares that are more than their fair market value. This idea is especially pertinent when discussing startup financing. Concerns have been raised over the valuation of startup shares in various nations, including India, particularly when those companies obtain money from venture capitalists or angel investors. Tax authorities may closely examine these kinds of transactions to make sure that the shares are valued at fair market value. The excess money may be classified as startup income and liable to taxation if the tax authorities determine that the shares were issued at a valuation greater than the fair market value.
The idea of an angel tax is covered in Section 56(2) (vii) (b) of the Income Tax Act of 1961. Every startup (i.e., unlisted businesses whose shares are not available for purchase on the stock market) that obtains investment from an angel investor is required under the Finance Act, 2012, in the IT Act to provide a specific amount of contributions to the government. When discussing angel investors, individuals who donate money to firms in exchange for ownership equity the phrase "angel tax" is frequently used. Taxing the extra premium on share valuation raises concerns since it would deter angel investors from funding firms. It's important to keep in mind that each country may have different laws and regulations governing angel taxes. In a broader sense, the word can also be used to describe any tax on investment profits or income from angel investing. For accurate and current information, always refer to the specific tax legislation in the applicable country.
