Summary: The abolition of angel tax under Section 56(2)(viib) of the Income-tax Act, 1961, through the Finance (No. 2) Act, 2024, removes income-tax exposure on share premiums covered by that provision from 1 April 2025. However, Indian companies issuing shares to foreign parent companies must continue complying with the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, and the Companies Act, 2013. Under FEMA pricing guidelines, an unlisted Indian company generally cannot issue equity instruments to a non-resident below their fair value, determined through an internationally accepted valuation methodology on an arm’s length basis and certified by an authorised professional. Preferential allotments also require compliance with Section 62(1)(c), including shareholder approval and registered-valuer requirements where applicable. Private placements must additionally satisfy Section 42, including prescribed offer documentation, receipt of subscription money, timely allotment and filing of Form PAS-3. Foreign investment transactions must also be reported to the Reserve Bank of India through Form FC-GPR within 30 days of allotment. Companies should monitor the 60-day allotment requirement, valuation-report dates, sectoral foreign investment limits, banking documentation and reporting deadlines. Delays may result in late submission fees, penalties or regulatory proceedings. Although the angel tax abolition simplifies income-tax compliance, maintaining proper valuation documentation, corporate approvals and timely FEMA reporting remains essential for a legally compliant share issue to a foreign parent.
What changed in the Income-tax Act
Section 56(2)(viib) taxed an unlisted company on the excess of the issue price over fair market value when shares were issued to residents, and in some cases to non-residents. The Finance (No. 2) Act, 2024 removed it with effect from 1 April 2025 for all classes of investors. Check how the Income-tax Act, 2025 deals with the matter for the year in which you are issuing. The change removes a risk for the issuer, but only on the tax side.
FEMA pricing
Under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, an unlisted Indian company must issue equity instruments to a non-resident at a price not lower than the fair value. The fair value is determined using any internationally accepted pricing methodology on an arm’s length basis, and is certified by a SEBI-registered merchant banker or a chartered accountant or cost accountant, as the rules and current directions provide. A price below the fair value is not permitted, so the valuation should be completed before the board approves the issue.
Company law steps
Allotment to a specific person, such as the parent, is a preferential allotment under section 62(1)(c) and needs a special resolution, with a valuation report from a registered valuer where the rules require it.
Private companies must also follow section 42 on private placement, including the offer letter and the return of allotment.
File the return of allotment with the Registrar of Companies within the time the rules allow, and keep the share certificates and register current.
Reporting to the RBI
The Indian company must report the inflow and the allotment through the FIRMS portal, using Form FC-GPR, within 30 days of allotment. The consideration must be received through banking channels, and the shares should be allotted within 60 days of receipt of the funds, otherwise the money must be refunded. Late reporting attracts a late submission fee and may lead to compounding, so the dates should be tracked.
A timeline to plan around
1. Fix the amount and the instrument, and confirm that the sector and cap permit it.
2. Get the valuation report and set a price at or above fair value.
3. Pass the board resolution and the special resolution, and issue the offer letter.
4. Receive the funds through the bank and get the foreign inward remittance certificate.
5. Allot the shares within 60 days of receipt, and file the return with the Registrar.
6. File Form FC-GPR within 30 days of allotment.
Common errors
A valuation report that is too old at the time of the transaction (check the validity period the current rules and your bank expect), or a price set before the valuation was received.
Allotment after the 60-day window without refunding or seeking permission.
Missing the FC-GPR filing because the company’s authorised dealer bank was not given the documents.
The abolition of angel tax helps, but a clean valuation file and on-time filings are still what protect the issue.
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Author bio: N. Sudheer, M.Com., FCS, LL.B., is a Partner at A2 Consultants, Hyderabad
