Summary: The Finance (No. 2) Act, 2024 abolished the angel tax by making Section 56(2)(viib) inapplicable from AY 2025-26, contrary to the common misconception that it was removed by the Finance Act, 2023. The abolition applies to all investors, including residents, non-residents, funds, and startups, making AY 2026-27 share issuances completely free from angel-tax exposure regardless of the share premium or investor category. However, legacy disputes for AY 2024-25 and earlier remain active through scrutiny, reassessment under Section 148, and pending appeals. The article clarifies that the key factor is the year of share issuance rather than present DPIIT recognition. It also highlights judicial precedents holding that taxpayers have the right to choose the DCF valuation method under Rule 11UA, that Assessing Officers cannot substitute the NAV method or reject DCF merely because projections differ from actual results, and stresses maintaining robust valuation and investment documentation for defending legacy assessments.
Angel Tax Is Abolished – But Section 56(2)(viib) Scrutiny Lives On: A Reality Check for the AY 2026-27 Filing Season
Three corrections clear the ground, because the popular framing of this subject is wrong on all three.
It was the Finance (No. 2) Act, 2024 — not the Finance Act, 2023 — that abolished angel tax. The 2023 amendment did the opposite: it extended Section 56(2)(viib) to non-resident investors. The 2024 Act (Budget of 23 July 2024) removed the provision.
It was abolished for all investors, not just DPIIT-recognised startups. Resident, non-resident, fund — every class. The mechanism: the 2024 Act inserted a proviso providing that Section 56(2)(viib) shall not apply on or after 1 April 2025, and on the CBDT’s own stated position the clause is not applicable from AY 2025-26. (The provision is also not carried into the Income-tax Act, 2025.)
So for AY 2026-27 — the return you are filing now — there is no angel tax at all. Shares issued in FY 2025-26 carry no Section 56(2)(viib) exposure, whatever the premium, whatever the investor. The provision is also absent from the Income-tax Act, 2025. The “AY 2026-27 startup valuation” that everyone is anxious about, as a fresh angel-tax risk, does not exist.
What does exist — and what makes this a live filing-season topic — is the legacy tail. Assessments and reassessments for the years when the provision was in force (broadly AY 2024-25 and earlier) remain open, and they surface as scrutiny notices, Section 148 reassessments and pending appeals precisely while you are filing this year’s returns. A founder who raised a premium round in FY 2022-23 or FY 2023-24 can still receive — or still be fighting — an angel-tax addition today. That is the real subject, and the good news is that the case law has turned decisively in the taxpayer’s favour.
Decision tree: does your startup still face angel-tax risk?
The determinant is when the shares were issued, not whether you are DPIIT-recognised today.
Were the shares issued in FY 2024-25 (AY 2025-26) or later? → No angel-tax risk. On the CBDT’s stated position the clause does not apply from AY 2025-26, so a FY 2024-25 round is already outside it. DPIIT status is irrelevant to angel tax for these years; you needed no exemption because there is no levy.
Were the shares issued in FY 2023-24 (AY 2024-25) or earlier? Then ask:
- Were you DPIIT-recognised and did you file the Form 2 / Form 56 exemption declaration at the time, within the conditions (paid-up capital plus premium within ₹25 crore, eligible investors, etc.)? → Protected by the exemption for that round — produce the DPIIT certificate and the declaration if questioned.
- Not DPIIT-exempt for that round (no recognition, or conditions not met, or no declaration filed)? → Legacy exposure. This is where the valuation defence does the work — and where the precedents below decide the outcome.
Note the asymmetry the brief writers usually miss: getting DPIIT-registered now does nothing for angel tax, because there is no prospective angel tax to be exempted from. DPIIT recognition is still worth having — for the Section 80-IAC tax holiday, IPR rebates, self-certification and Seed Fund access — but “register to lock in the 56(2)(viib) exemption” is advice with no remaining purpose.
The FAQ — with the precedent that wins each point
Q1. We raised at a premium in FY 2025-26. Will AY 2026-27 scrutiny add angel tax? No. Section 56(2)(viib) does not apply to AY 2026-27. A premium that would once have been taxed is now simply share capital and premium. (Other provisions can still apply — Section 68 on the genuineness/source of the money, for instance — but that is not angel tax.)
Q2. The AO rejected our DCF report and substituted the NAV method. Is that allowed? No. Under Rule 11UA(2), the choice between the DCF and NAV methods belongs to the assessee. As the Delhi High Court held in PCIT v. Cinestaan Entertainment Pvt. Ltd. (2021) 433 ITR 82, affirming the ITAT, the AO has no jurisdiction to tinker with the valuation, substitute his own value, or reject the chosen method. The Bombay High Court in Vodafone M-Pesa Ltd v. PCIT [2018] 92 taxmann.com 73 is to the same effect: the AO may scrutinise the report and confront the assessee, but the basis remains the method the assessee opted for.
Q3. The AO says our projections didn’t match actual results, so the DCF is unreliable. That argument has been rejected repeatedly. DCF is forward-looking; in Cinestaan, the Delhi High Court held that valuation is not an exact science and cannot be done with arithmetic precision, and that the AO cannot fault a projection-based valuation merely because later actuals diverged. The principle is alive in 2026 — in Catwalk Worldwide Ltd v. ACIT the Mumbai ITAT deleted a ₹36.54 crore addition on exactly this ground, accepting that demonetisation, GST and e-commerce competition explained the variance, and noting that an unrelated third-party strategic investor’s participation corroborated the value.
Q4. Does independent investor participation help our case? Strongly. Cinestaan treats third-party investors putting real money in as evidence that the FMV is genuine — the tax authority does not get to second-guess the commercial wisdom of arm’s-length investors. Document who invested and that they were unrelated.
Q5. Should we get DPIIT-registered now to avoid angel tax? Not for angel tax — it is abolished. Get DPIIT recognition for the benefits that remain (80-IAC, IPR, Seed Fund, self-certification). For a legacy year, what matters is whether you held recognition and filed the declaration at the time, not today.
Q6. Can old years still be reopened? Yes — reassessment under the Section 148 machinery can reach back within the applicable limitation (now materially shorter than the old regime, and tied to the escaped-income threshold). A round from a few years ago can still be reopened, which is why the documentation below matters even after abolition.
Building a scrutiny-proof DCF — what actually wins
The most common practitioner mistake in a legacy angel-tax defence is to hand over the DCF report and stop there. The report is necessary but not sufficient. The cases that the Revenue wins are the ones where the assessee could not explain the basis of the projections; the cases the taxpayer wins are where the projections are anchored to something. The AO’s argument in Cinestaan was precisely that the assessee “made no effort to justify the projections” — the taxpayer prevailed because the method was validly chosen and valuation is not an exact science, but you do not want to litigate from the back foot. Make the report defensible by documenting:
- The assumptions behind the forecast — revenue drivers, growth rates, margins — and why each was chosen, in writing, as at the valuation date.
- Industry growth benchmarks that corroborate the top-line assumptions, from sources contemporaneous with the valuation.
- Comparable funding rounds and market data — what similar startups raised at, as independent corroboration of the premium.
- Evidence of product-market fit at the valuation date — contracts, pipeline, user metrics — that a forecast could reasonably build on.
- The reason for any later variance — demonetisation, GST, a funding-winter, a lost customer — so that hindsight cannot be weaponised against the forecast.
And one technical point practitioners still get wrong: for Section 56(2)(viib), the DCF report must be from a Merchant Banker (since Notification 23/2018 dated 24 May 2018); a Chartered Accountant’s DCF report, valid for earlier years, is not acceptable for the years after that change. Check who signed the report for the year under dispute.
Five documents to retain for a legacy angel-tax scrutiny
1. The valuation report for the round — Merchant Banker DCF (or CA, for pre-24-May-2018 years) — with the full assumption set, not just the per-share conclusion.
2. The board-approved business plan / projections that the DCF was built on, dated as at the valuation.
3. The cap table and the allotment record — board and shareholder resolutions, return of allotment (PAS-3), share certificates.
4. Investor documentation — subscription/shareholders’ agreements, proof that investors were independent and arm’s-length, and their KYC and source of funds (this also answers any Section 68 angle).
5. DPIIT recognition and the Form 2 / Form 56 declaration, if the exemption was claimed for that round, plus correspondence evidencing the conditions were met.
Keep these for every pre-FY-2024-25 round until the assessment and reassessment windows for that year have closed. Abolition ended the levy going forward; it did not close the legacy files.
Frequently asked questions
1. When exactly was angel tax abolished? By the Finance (No. 2) Act, 2024, with Section 56(2)(viib) omitted from 1 April 2025 (AY 2025-26), for all classes of investors. It is also absent from the Income-tax Act, 2025.
2. Is there any angel tax in AY 2026-27? No. FY 2025-26 share issues carry no Section 56(2)(viib) exposure.
3. Which years are still exposed? Broadly AY 2024-25 and earlier, while their assessment/reassessment windows remain open.
4. Can the AO substitute NAV for our DCF? No — the method is the assessee’s choice under Rule 11UA(2) (Cinestaan; Vodafone M-Pesa).
5. Does getting DPIIT-registered now remove angel-tax risk? There is no prospective angel-tax risk to remove. DPIIT still matters for 80-IAC and other benefits.
6. Is “on-money” the same as angel tax? No. Angel tax (56(2)(viib)) is about share premium above FMV; “on-money”/unexplained-credit additions run under Sections 68/69. They can appear in the same assessment but are defended on different grounds.
******
This article is general information as on 25 June 2026 and is not advice on any specific assessment. The abolition, Rule 11UA and the cited rulings should be checked against the year and facts of your case before they are relied on.
The author, CA Sundram Gupta, is the founder of Patron Accounting LLP, a CA & CS firm headquartered in Pune with offices in Mumbai, Delhi and Gurugram, advising startups on DPIIT recognition, valuations and the defence of legacy share-premium assessments.
Author Bio
