Application Of Angel Tax On Non-Residents (Recent Amendment Introduced Via Union Budget)



The inclusion of non-residents in the scope of Section 56(2)(viib) of the Income-Tax Act, 1961 (“Act”), colloquially known as the “Angel Tax”, is one of the major changes to direct taxes included in the Union Budget of India, 2023. This clause addresses the taxability that may arise for an Indian company, following the issuance of shares in certain circumstances. The proposed change is set to kick into effect from 1st April 2024.

According to Section 56(2) (viib) of the Act, when a company issues shares to a resident investor at a value higher than the fair market value (“FMV”) of such shares, the excess of the issue price over the FMV of the shares is regarded as the income of the issuing company. Such income is subject to taxation at the company’s applicable corporate tax rate. Furthermore, this provision stipulates that the excess received over the FMV (whereby FMV is computed as per the formulae given under Rule 11UA (2) of the Income Tax Rules, 1962) is taxable as “income from other sources”.

Proposal Under the Finance Bill, 2023

Section 56(2) (viib) of the Act has undergone a significant change as a result of the Finance Bill, 2023 (“Bill”). The words “being a resident” have been eliminated from Section 56(2)(viib) of the Act. Instead, through the Bill, the government has suggested expanding the scope to include non-resident investors, which implies that any investment that a start-up receives from a foreign investor will now be considered as income and subject to taxes.

However, the planned amendment is raising significant concerns amongst non-resident investors who wish to make investments in India, as it may have a detrimental impact on their investments.

Notably, the Act establishes a framework for determining FMV using either the ‘net asset value’ approach under which a valuation certificate must be obtained from a chartered accountant or a merchant banker, or the ‘discounted cash flow’ method as per which a valuation certificate is to be obtained from a merchant banker only. Earlier, it was sufficient for a non-resident investor to meet the Foreign Exchange Management Act’s (“FEMA”) mandated value standards. However, the proposed amendment would now also require non-resident investors to guarantee FMV compliance with the Act. In order to minimise any tax liability, taxpayers will likely find it burdensome to ensure that the FMV value under both the Act and FEMA is consistent.

Considering the above, non-resident investors may prefer to limit their investment to the FMV of the shares or use different investment strategies.


The proposed change under the Act will certainly impact the return on investments which could act as a deterrent for foreign investors looking to invest in India. However, the government is yet to officially clarify its stand.

As it stands today, start-ups will have to pay a tax on the difference between the capital raised and the FMV for the securities sold to a non-resident investor. Needless to say, clarity on this matter is essential for the start-up ecosystem in the country. All concerns raised by the relevant stakeholders need to be addressed soon.

Please reach out to Praveen Raju and Renuka Abraham for queries.