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New Angel Tax rules notified
News: The Income Tax Department has notified new angel tax rules that comprise a mechanism to evaluate the shares issued by unlisted startups to investors.
What is Angel Tax?
• Angel tax is a tax that is levied on the funding received by startups from an external investor. This tax is applicable under section 56 (2) (viib) of the Income Tax Act of 1961.
• The primary objective of this tax was to prevent money laundering issues.
How does it work?
• When a startup receives investment from an angel investor, and the total investment value exceeds the startup’s Fair Market Value (FMV), the excess amount is considered as 'income from other sources'. This excess amount is taxable at a rate of 30.9%.
• For example, if a startup receives an investment of Rs 15 crore, and the FMV of the shares issued is Rs 10 crore, the remaining Rs 5 crore is considered excess money and is taxable.
What are the new angel tax rules?
• As per the changes in Rule 11UA of I-T rules, the Central Board of Direct Taxes (CBDT) provides that the valuation of compulsorily convertible preference shares (CCPS) and equity shares issued by unlisted startups can be based on the fair market value.
• The amended rules also retain the five new valuation methods proposed in the draft rules for consideration received from the non-residents: Comparable Company Multiple Method, Probability Weighted Expected Return Method, Option Pricing Method, Milestone Analysis Method and Replacement Cost Method.
• The amended rule brings in more clarity for both investor and investee basis that an appropriate valuation method can be adopted, thereby, reducing the chances of any future litigation.