Last reviewed: 10 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 under the new Income-tax Act 2025 there is no equivalent provision at all from FY 2026-27 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, typically using either the Discounted Cash Flow (DCF) method or the Net Asset Value (NAV) method — as income in the hands of the issuing company itself. 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, but in practice 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, under the new Income-tax Act 2025, there is no equivalent angel-tax provision from FY 2026-27 (AY 2026-27) onward either. 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). Assessments, reassessment notices under Section 148, and appeals for those years 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.
Courts have settled one important sub-question in the taxpayer's favour: the choice between DCF and NAV is the assessee's prerogative, not the Assessing Officer's. 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.
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
| Aspect | Share issue before 1 April 2024 | Share issue on/after 1 April 2024 |
|---|---|---|
| Section 56(2)(viib) applicability | Fully applicable; angel-tax exposure exists | Not applicable; provision abolished from AY 2025-26 |
| Valuation method scrutiny | DCF projections can be questioned on reasonableness; NAV cannot be forced as a substitute | Not a live issue — no valuation-premium taxation under this head |
| Pending 148 notices / assessments | Continue to be litigated on the old framework | Not applicable |
| Documentation needed | Full DCF workpapers, business plan basis, comparable-round pricing | Standard company-law and FEMA compliance for the round; no angel-tax defence file required |
| DPIIT exemption relevance | Still relevant if claimed for that year's assessment | Not relevant — the underlying provision itself no longer applies |
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 under settled law.
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 conditional exemption has its own compliance requirements that must have been met at the relevant time to be relied upon.
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. 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
Does the abolition of Section 56(2)(viib) apply to my old funding round?
Only if the shares were issued on or after 1 April 2024 (AY 2025-26 onward). The abolition is prospective; share issues before that date remain fully governed by the old Section 56(2)(viib) framework, including for any pending assessment, reassessment or appeal.
I already received a notice for a share issue from 2022. Does the 2024 change help me?
No, not directly. The 2024 amendment does not retrospectively close disputes for AY 2024-25 and earlier. You still need to build the full valuation defence — DCF workpapers, business plan basis, and comparable-round pricing — for that legacy year as if angel tax fully applies.
Can the Assessing Officer force me to use NAV instead of DCF for an old round?
Courts have generally held that the choice between DCF and NAV is the assessee's prerogative, not the Assessing Officer's. The AO can question the reasonableness and basis of the projections used within the DCF method, but should not simply substitute NAV in its place.
Does it matter that my actual revenue fell short of the DCF projections?
A shortfall alone is not conclusive. The relevant test is generally whether the projections had a reasonable, documented basis at the time they were made, not whether they turned out to be accurate in hindsight. Strong contemporaneous documentation is what makes this argument credible.
Is there still any angel-tax exposure for funding rounds after 1 April 2024?
Based on the current law, no. Section 56(2)(viib) does not apply to share issues from AY 2025-26 onward, and the new Income-tax Act 2025 carries no equivalent provision from FY 2026-27, so genuinely new fundraising is not exposed to this specific issue.
Does DPIIT recognition protect my old funding round from angel-tax scrutiny?
DPIIT-recognised startups had a conditional exemption route, but it depends on specific conditions being met at the relevant time and does not automatically shield every past round. Whether it applies to your facts needs to be checked against the conditions in force for that assessment year.
Legacy angel-tax notices and valuation disputes for pre-2024 funding rounds require careful, well-documented defence even though the underlying provision has since been abolished. We help startups and closely-held companies organise their valuation files and respond to notices and reassessment for these legacy years.
Income Tax Notice ManagementROC FilingsTalk to usThis 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.