Angel Tax Is Abolished But Old Disputes Continue: 2026 Status

Last reviewed: 25 September 2026. Founders often assume that because angel tax has been abolished, any pending notice or assessment about historic share valuations is now moot. It is not. The Finance (No. 2) Act 2024 abolished Section 56(2)(viib) prospectively, effective from Assessment Year 2025-26, and the Income-tax Act, 2025 carries no equivalent provision at all for income from 1 April 2026 onward — but this change does not reach backward. Share issues before 1 April 2024 remain fully exposed to assessment, reassessment under Section 148, and appeal on the old DCF-versus-NAV valuation battleground, and several startups are discovering this the hard way as legacy notices continue to arrive in 2026.

What Section 56(2)(viib) taxed, and why it mattered so much

Section 56(2)(viib), commonly called "angel tax," taxed the excess of the share issue price received by a closely-held company over the fair market value of those shares — computed under Rule 11UA — as income in the hands of the issuing company itself. Until AY 2023-24 it applied only to consideration received from residents; the Finance Act 2023 extended it to consideration from non-resident investors as well, with effect from AY 2024-25, which is why rounds with foreign investors in FY 2023-24 now form part of the legacy dispute population. For most of the provision’s life the choice was between the Discounted Cash Flow (DCF) method and the Net Asset Value (NAV) method, but that is no longer the whole picture for the later legacy years: CBDT Notification No. 81/2023 dated 25 September 2023 amended Rule 11UA with effect from that date to add five further methods for issues to non-resident investors — Comparable Company Multiple, Probability Weighted Expected Return, Option Pricing, Milestone Analysis and Replacement Cost — and, more usefully, a 10% safe harbour tolerance band available on both resident and non-resident investments. Share issues made between 25 September 2023 and 31 March 2024 fall in AY 2024-25 and sit squarely inside the population of disputes still open today, so that band and those additional methods belong in the defence file for any round in that window. Where a non-resident subscribed in that window, the FEMA pricing floor (issue price not below fair value) and the Rule 11UA ceiling applied to the same allotment, so the two valuations should be read together; our Rule 11UA and FEMA valuation guide explains how they interact. For a startup that raised a funding round at a premium justified by its growth projections rather than its current book value, this provision could convert a genuine equity fundraise into a large taxable event if the Assessing Officer did not accept the projections underlying the DCF valuation. DPIIT-recognised startups had a conditional exemption route — DPIIT Notification G.S.R. 127(E) dated 19 February 2019 read with CBDT Notification S.O. 1131(E) dated 5 March 2019 issued under the second proviso to the clause — under which a recognised startup that filed the declaration in Form 2 was outside Section 56(2)(viib), provided its aggregate paid-up share capital and share premium did not exceed Rs 25 crore after the proposed issue and it did not invest in the specified asset classes for seven years. In practice, however, many startups — recognised and unrecognised alike — still received notices questioning valuations, particularly where growth targets in the DCF model were not met in later years and the AO used hindsight to challenge the original projections.

The 2024 abolition: what changed, and from when

The Finance (No. 2) Act 2024 abolished Section 56(2)(viib) prospectively, with effect from Assessment Year 2025-26. In practical terms, that means share issues made on or after 1 April 2024 are no longer covered by this provision at all — a company raising a funding round today does not need to run the DCF-versus-NAV valuation gauntlet for angel tax purposes. Carrying this forward, the Income-tax Act, 2025 contains no equivalent of Section 56(2)(viib) at all. Be careful with the years here, because the two Acts overlap in the calendar: the 2025 Act came into force on 1 April 2026 and governs income earned from that date, which it labels tax year 2026-27. FY 2025-26 is not under the new Act — it remains governed by the Income-tax Act, 1961 and is assessed in AY 2026-27. The only provision in the 2025 Act that touches share value, Section 92(2)(m), taxes a recipient who acquires property for less than fair market value; it does not tax a company for issuing shares above it, so it is not an angel-tax successor. For genuinely new fundraising, this is a real and welcome simplification — one of the most-litigated friction points in startup taxation has effectively been removed for future transactions.

The part founders miss: abolition is not retrospective

The critical point — and the one that catches founders and finance teams off guard — is that the abolition does not retrospectively wipe out disputes relating to share issues before 1 April 2024 (that is, AY 2024-25 and earlier). Nor does the commencement of the Income-tax Act, 2025 close them: Section 536(2)(c) of that Act preserves the repealed 1961 Act for proceedings relating to earlier years, and CBDT’s own transition FAQs confirm that assessments, reassessments, appeals and rectifications for those years continue under the 1961 Act — and that fresh notices for those years can still be issued under it after 1 April 2026, subject to the Section 149 time limits. Reassessment for those years therefore follows the Section 148A / Section 148 procedure of the 1961 Act, not the reassessment provisions of the 2025 Act. Assessments, reassessment notices under Section 148, and appeals for those years therefore continue to be litigated on exactly the same valuation battleground that existed before the amendment: whether the DCF projections used at the time of the fundraise were a reasonable, contemporaneous basis for pricing the round, or whether the Assessing Officer can substitute a different valuation (typically NAV, which is usually far lower for an early-stage company) and tax the difference.

High Courts and ITAT benches have consistently held, in the taxpayer's favour, that the choice between DCF and NAV is the assessee's prerogative, not the Assessing Officer's (for example, Vodafone M-Pesa Ltd., Bombay High Court, 2018). There is no Supreme Court ruling on the point, so it remains an argument to be made on the record rather than a closed question. What remains open to challenge is the reasonableness and basis of the projections used within the DCF method itself — the AO can question whether the assumptions were realistic at the time they were made, but cannot simply discard DCF and substitute NAV merely because actual performance later fell short of projections. This distinction is the crux of almost every pending angel-tax dispute for pre-April-2024 rounds.

If the company is DPIIT-recognised, check the CBDT route before building a defence file

Founders and advisers routinely go straight to reconstructing a DCF defence for a legacy year when, for a recognised startup, an administrative route may close the matter without any valuation argument at all. CBDT Circular No. 16/2019 dated 7 August 2019 and the Consolidated Circular F.No. 173/149/2019-ITA.I dated 30 August 2019 direct, for a DPIIT-recognised startup that has filed the declaration in Form 2: that where the case is under limited scrutiny confined to Section 56(2)(viib), the startup’s contention is to be summarily accepted; that where Section 56(2)(viib) is one of several issues in scrutiny, no enquiry is to be made on that ground and the remaining issues examined only with supervisory approval; and that before the Income Tax Appellate Tribunal the Department is not to press the ground relating to the Section 56(2)(viib) addition. A startup cell was constituted to take up grievances on these lines.

The practical sequence for a legacy notice is therefore: first establish whether the company held DPIIT recognition and had filed Form 2 for the relevant year and met the Rs 25 crore condition; if it did, put the circulars on record at the earliest stage and ask for the ground to be dropped. Only if recognition or the Form 2 declaration is absent, or the conditions were not met, does the full DCF-versus-NAV exercise below become the main event. Getting this order of operations wrong costs a recognised startup months of avoidable valuation work.

Revenue's view versus the founder's view on legacy rounds

The Assessing Officer's typical approach in these legacy cases is to compare the DCF projections filed at the time of the funding round against the company's actual subsequent financial performance, and where there is a significant shortfall, to argue that the original projections were unrealistic or not bona fide — and therefore that the premium charged was not justified by genuine fair market value. Founders and their counsel respond that hindsight cannot be the test: a valuation exercise is inherently forward-looking, and the correct question is whether the assumptions were reasonable and had a documented basis at the time they were made — market comparables, the business plan then in place, term sheet negotiations with the investor, and the company's own board-approved projections — not whether they turned out to be accurate in hindsight. This is squarely the same dispute that existed before the 2024 abolition; the amendment has simply frozen the population of cases that will ever be litigated on this point, without resolving any of them.

Comparison: pre and post 1 April 2024 share issues

Worked example: a Series A round now under reassessment

A technology startup raised a Series A round in December 2022 at a valuation implying a share price of ₹850, based on a DCF model projecting revenue growth from ₹3 crore to ₹28 crore over five years. By late 2025, the company had grown to only ₹9 crore in revenue — well short of the original projection — and in early 2026 received a Section 148 notice reopening AY 2023-24, with the Assessing Officer proposing to substitute a NAV-based valuation of roughly ₹140 per share and add the difference of ₹710 per share across the shares allotted, an addition running into several crores.

Because this round was allotted in December 2022 — well before the 1 April 2024 cut-off — the 2024 abolition of Section 56(2)(viib) offers this company no protection at all; the dispute must be fought entirely on the old battleground. The company's defence rests on demonstrating that the December 2022 projections had a reasonable, documented basis at the time: the board-approved business plan, the term sheet and investor due-diligence correspondence from that period, and comparable valuations from similarly-placed startups raising capital in the same funding cycle. The argument is not that the projections proved accurate — they plainly did not — but that hindsight underperformance does not, by itself, make a contemporaneous DCF valuation unreasonable, and that the choice of DCF over NAV was the company's prerogative, as High Courts and ITAT benches have consistently held.

Common mistakes founders make with legacy angel-tax exposure

• Assuming the 2024 abolition closes all angel-tax risk, and therefore not preserving or organising the DCF workpapers, board minutes, and investor correspondence from pre-April-2024 rounds.
• Treating a Section 148 notice for an old funding year as low-priority because "angel tax doesn't exist anymore" — statutory reassessment timelines still apply strictly to these legacy years.
• Not distinguishing, in a reply, between "the projections turned out wrong" and "the projections were unreasonable when made" — conflating the two concedes ground that need not be conceded.
• Discarding the original valuation report and supporting model once the round has closed, making it far harder to reconstruct a contemporaneous defence years later when a notice finally arrives.
• Assuming DPIIT recognition alone is a complete shield — the exemption under G.S.R. 127(E) and S.O. 1131(E) required a Form 2 declaration, the Rs 25 crore paid-up capital and premium ceiling tested after the issue, and no investment in the specified asset classes, all at the relevant time.
• The opposite error, and the more expensive one: being DPIIT-recognised and never invoking Circular No. 16/2019 or the Consolidated Circular of 30 August 2019, and instead paying for a full valuation defence on a ground the Department is directed not to press.
• For rounds issued between 25 September 2023 and 31 March 2024, overlooking the 10% safe harbour band inserted into Rule 11UA by Notification No. 81/2023 — in a marginal case it disposes of the addition without any argument about projections.

What startups and promoters should do now

If your company allotted shares at a premium before 1 April 2024 and any assessment, reassessment notice, or appeal for that year is still open, treat the file as if angel tax fully applies — because, for that year, it does. Start with the cheapest question: was the company DPIIT-recognised with Form 2 filed for that year? If so, put Circular No. 16/2019 and the Consolidated Circular F.No. 173/149/2019-ITA.I dated 30 August 2019 on record and ask for the ground to be dropped before spending anything on valuation work. If the round was issued on or after 25 September 2023, check the 10% safe harbour band under amended Rule 11UA next. Only then turn to the valuation defence. Locate and organise the original DCF valuation report, the board-approved business plan and financial projections that fed into it, term sheet and investor negotiation correspondence, and pricing data from comparable funding rounds around the same period; this is the evidentiary base for arguing that the valuation was reasonable when made. Where a Section 148 notice has already been received, respond within the statutory timeline and resist any attempt by the Assessing Officer to simply substitute NAV for DCF without engaging with the reasonableness of the original assumptions. For funding rounds structured on or after 1 April 2024, this exposure does not arise at all, so the planning priority shifts entirely to standard company-law, FEMA, and disclosure compliance for the round rather than angel-tax defence.

Frequently asked questions

This article is general information on a currently disputed/contested area of tax law as of the review date above, not opinion on any specific case; the legal position may change, and outcomes always depend on the specific facts of the case — please consult a professional before acting.