Angel Tax Gone: Do Startups Still Need Valuation?

Angel tax is gone. Startup valuation reports are not.

The abolition of Section 56(2)(viib) of the Income-tax Act, 1961, effective from Assessment Year 2025-26, removed the provision that treated a share premium above Fair Market Value as taxable income in the hands of the issuing company. The Income-tax Act, 2025, which replaced the 1961 Act entirely with effect from 1 April 2026, does not reintroduce any equivalent. The omission is structural, not incidental.

But FEMA pricing guidelines, employee stock option taxation, secondary share transfers, down-round transactions, and certain legacy assessment proceedings continue to place Fair Market Value at the centre of the conversation.

The role of valuation has changed. The need for it has not.

For the broader question of timing, see our companion piece: When Should a Startup Be Valued?

The Short Answer
What Angel Tax Was — and Why It Made Valuation Defensive
What the Abolition Actually Changed
The New Statutory Landscape: ITA 2025 and IT Rules 2026
Five Situations Where Valuation Still Matters in 2026
Legacy Angel Tax Cases Are Not Automatically Closed
NAV or DCF: Choosing the Right Method
From Tax Defence to Fundraising Strategy
Quick Reference: When Does a Startup Need a Valuation Report?
Frequently Asked Questions

1. The Short Answer

Angel tax is gone. Startup valuation reports are not.

The role of valuation has changed. The need for it has not.

2. What Angel Tax Was — and Why It Made Valuation Defensive

Section 56(2)(viib) applied when a closely held company issued shares at a price higher than their prescribed Fair Market Value. The excess consideration was treated as income from other sources in the hands of the company.

The mechanism was straightforward. A startup issuing shares at ₹100 per share would need to demonstrate that the prescribed FMV supported that price. If the tax authorities determined the FMV to be ₹38, the difference of ₹62 per share could be treated as taxable income. Across thousands of shares in a funding round, the exposure was material.

This created a very specific dynamic. Valuation reports became defensive documents. DCF models were built not primarily to inform the fundraising conversation but to protect the company from a Section 56(2)(viib) challenge. Revenue projections, margin assumptions, and discount rates were all documented with one eye on what a tax officer might accept.

The provision was criticised on multiple grounds. Early-stage valuations are inherently forward-looking. A young company with no revenue and a large addressable market is valued on potential, not on historical cash flows. Asking a tax authority to validate that potential on the basis of a prescribed formula created genuine and recurring friction.

The Finance (No. 2) Act, 2024 removed the provision, and the Income-tax Act, 2025 has not revived it. That chapter is closed.

3. What the Abolition Actually Changed

The abolition removed one specific tax risk: a high share premium in a primary issue to domestic or foreign investors no longer creates an angel-tax liability in the company’s hands. The position is the same under both the 1961 Act from AY 2025-26 and the 2025 Act from AY 2026-27 — the share premium flows into the company entirely free of income tax under any surviving provision.

What the abolition did not change:

The question of whether a transaction price is too low — rather than too high — remains relevant under a different provision. The question of whether a foreign investment complies with FEMA pricing norms remains mandatory. The question of what FMV is for an ESOP exercise remains significant for employee taxation. The question of whether a secondary transfer creates a taxable difference in the buyer’s hands remains live.

Founders who conclude that “no angel tax means no valuation” are conflating one specific compliance trigger with the much wider role that Fair Market Value plays across India’s tax and regulatory architecture.

4. The New Statutory Landscape: ITA 2025 and IT Rules 2026

The Income-tax Act, 2025 came into force on 1 April 2026, repealing the Income-tax Act, 1961. While the new law is largely a consolidation and re-codification of existing provisions, it renumbers virtually every section and in certain areas makes substantive amendments.

For startup valuation, the critical mapping is as follows:

Concept	ITA 1961 / IT Rules 1962 (pre-April 2026)	ITA 2025 / IT Rules 2026 (from April 2026)
Angel tax (share premium above FMV)	Section 56(2)(viib) — abolished w.e.f. AY 2025-26	Not reintroduced
Receipt of shares below FMV (buyer’s exposure)	Section 56(2)(x)	Section 92(2)(m)
Transfer of unquoted shares below FMV (seller’s CG)	Section 50CA	Section 79
NAV method for unquoted equity FMV	Rule 11UA(1)(c)(b), IT Rules 1962	Rule 57, IT Rules 2026

Rule 57 of the Income-tax Rules, 2026 (notified by CBDT vide Notification No. 22/2026, G.S.R. 198(E), dated 20 March 2026) lays down the framework for determining the Fair Market Value of specified properties for the purposes of Sections 92, 79, and 26(2)(j). Unquoted equity shares are valued using a prescribed formula: (A + B + C + D − L) × (PV/PE), where A represents adjusted book value of assets, B the market value of jewellery and artistic work, C the fair market value of shares and securities, D the stamp duty value of immovable property, L prescribed liabilities, and PV/PE the per-share apportionment.

Any valuation report referencing Section 56(2)(x) or Rule 11UA for transactions on or after 1 April 2026 is citing repealed law. The operative references for current transactions are Section 92(2)(m) and Rule 57.

5. Five Situations Where Valuation Still Matters in 2026

5.1 Foreign Investment and FEMA Pricing

When a non-resident investor participates in a funding round, the transaction must comply with the pricing guidelines under India’s foreign investment framework, set out in the RBI Master Direction on Foreign Investment in India. For an issue of equity shares or convertible instruments to a non-resident, the issue price generally cannot be lower than the value determined using an internationally accepted methodology on an arm’s length basis.

The DCF method is commonly used for unlisted companies, though the appropriate methodology depends on the nature of the business. A formal valuation report provides the documented basis required for Form FC-GPR reporting and for the authorised dealer bank’s review. See our detailed guide: When Is a Merchant Banker Required in FEMA Valuations?

Under the angel tax regime, founders sought valuations to justify why the issue price was not too high. Under FEMA, the concern is the opposite: ensuring the price is not below the applicable minimum. The transaction is the same; the regulatory question is inverted.

5.2 Below-FMV Transactions and Section 92(2)(m)

Section 92(2)(m) of the Income-tax Act, 2025 is the successor to Section 56(2)(x) of the 1961 Act. Where any person receives shares or other property for consideration less than the aggregate fair market value by an amount exceeding ₹50,000, the difference may be treated as income in the hands of the recipient.

This provision is particularly relevant in secondary transactions, down-rounds, founder transfers, and arrangements where shares change hands at a significant discount to FMV. Commercially negotiated discounts do not automatically provide tax shelter. The buyer’s tax position depends on how the transaction price compares with the FMV determined under Rule 57.

The old concern under angel tax was that the share price was too high. Under Section 92(2)(m), the concern is that it may be too low. Different section, different taxpayer, same underlying need for a defensible FMV.

5.3 ESOP Exercises and Perquisite Taxation

When an employee exercises stock options, the difference between the Fair Market Value of the shares on the exercise date and the exercise price paid by the employee is taxable as a perquisite. The FMV for unlisted company shares on the exercise date is determined by a SEBI-registered Category I Merchant Banker.

For a startup with a large ESOP pool, this figure directly affects how much tax employees pay at the time of exercise. A defensible, contemporaneous valuation protects both the employee and the employer from subsequent challenge. For a fuller walkthrough of ESOP design and valuation, see our ESOP Consultant guide for startup founders.

5.4 Secondary Transfers Under Section 79

Under Section 79 of the Income-tax Act, 2025 — corresponding to old Section 50CA — where the consideration for transfer of an unquoted share is less than its fair market value, the fair market value is substituted as the full value of consideration for computing capital gains in the hands of the transferor.

Founders and early investors who transfer shares at a discounted price must account for this provision. The capital gains computation may be based on FMV rather than the actual transaction price, regardless of commercial justification.

5.5 Financial Reporting, Acquisitions, and Corporate Events

As startups grow, valuation becomes relevant beyond tax compliance. Buy-backs, sweat equity issuances, acquisitions requiring purchase price allocation, and Ind AS 36 impairment testing all require defensible FMV assessments. Investor due diligence for institutional rounds increasingly involves scrutiny of the methodology and assumptions underlying the company’s valuation, not merely the headline number.

6. Legacy Angel Tax Cases Are Not Automatically Closed

The repeal of the Income-tax Act, 1961 does not disturb anything relating to tax years before 1 April 2026. Pending proceedings relating to earlier years will continue under the relevant transitional provisions.

A startup that raised capital at a high premium during FY 2022-23 or FY 2023-24 may still have assessments, scrutiny notices, or appeals relating to angel tax under Section 56(2)(viib). The abolition is prospective. It does not extinguish pending demands or reopen closed assessments in favour of taxpayers.

For those companies, the original valuation report, financial projections, board presentations, DCF workings, and investor documentation remain the first line of defence. A spreadsheet reconstructed after the fact will not carry the same evidential weight as contemporaneous documentation.

If your startup raised funds under the old regime and has open assessments or unresolved demands, preserve those files carefully and seek specific professional advice on the status of each proceeding.

7. NAV or DCF: Choosing the Right Method

The choice of methodology is not a matter of which number is more favourable. It is a matter of which approach is appropriate for the purpose, the provision, and the nature of the business.

The NAV (Net Asset Value) method under Rule 57 uses a prescribed formula based on the balance sheet: adjusted book value of assets less specified liabilities, apportioned to the per-share level. It is the default method for FMV determination under Section 92(2)(m) for secondary transfers and similar transactions. No merchant banker report is required for this computation; the formula is self-contained.

The DCF method is forward-looking. It estimates future free cash flows and discounts them to present value using an appropriate discount rate, typically capturing a risk premium for the stage, sector, and execution uncertainty of the business. For ESOP valuations and for primary issues where the company opts for DCF under Rule 57, a SEBI-registered Category I Merchant Banker must certify the valuation.

The critical consideration for DCF is the quality of assumptions. Revenue projections must connect with the company’s historical traction, product roadmap, market opportunity, and realistic customer acquisition capacity. Margin assumptions must reflect the actual economics of the business. A valuation inflated by unrealistic growth rates does not become defensible simply because a DCF model produces it. See also: What Valuation Methods Do VCs Prefer in India?

The objective in both cases is the same: a value that can be logically explained, technically supported, and defended for the specific purpose for which it was prepared. The number is the conclusion. The assumptions are the story.

8. From Tax Defence to Fundraising Strategy

For most of the period between 2012 and 2024, startup valuation in India was shaped by one question: what number can we defend before the tax authorities?

That framing is now obsolete for primary issuances. The abolition of angel tax, and the Income-tax Act, 2025’s explicit decision not to revive any equivalent provision, creates a meaningful opportunity for founders to approach valuation differently.

An investor-ready valuation answers different questions: How quickly is revenue growing and what explains the trajectory? What does customer acquisition cost and how does retention trend? Can margins improve at scale and what drives that? How large is the realistic addressable market given the company’s positioning? What must the business achieve over the next three to five years to justify today’s price?

These are the questions that institutional investors and sophisticated venture capital funds actually ask. A DCF may anchor the intrinsic value discussion. Comparable company multiples may show how the market prices similar businesses. Precedent transaction data may provide another reference point. Together, these approaches help founders understand not just what the startup may be worth, but why an investor may agree — or disagree — with that assessment.

Used well, valuation becomes part of the fundraising strategy rather than an afterthought produced once the term sheet is signed. The strongest founders do not walk into an investor meeting with only a number. They understand the story behind it, and they can defend the assumptions that produce it. Founders with a US flip structure or dual valuation requirement should also see Rule 11UA vs 409A Valuation: A Complete Comparison Guide.

9. Quick Reference: When Does a Startup Need a Valuation Report in 2026?

Transaction / Situation	Valuation Required?	Applicable Provision	Who Must Sign?
Primary issue to foreign investor	Yes	FEMA pricing guidelines	SEBI Category I Merchant Banker
ESOP exercise (unlisted company)	Yes	Section 17(2)(vi), ITA 2025; Rule 3, IT Rules 2026	SEBI Category I Merchant Banker
Secondary transfer (NAV basis)	Computation required	Rule 57, IT Rules 2026 — Sections 92(2)(m) / 79	Self-computed (no MB report required)
Secondary transfer (DCF basis)	Yes	Rule 57, IT Rules 2026	SEBI Category I Merchant Banker
Primary issue to resident investor (no foreign capital)	Not required for tax purposes	Angel tax removed; Section 92(2)(m) not triggered if buyer pays FMV or above	N/A
Down-round or below-FMV transfer	Assessment strongly advisable	Section 92(2)(m), ITA 2025	SEBI Category I MB (if DCF used)
Legacy angel tax proceedings	Existing documentation critical	Section 56(2)(viib), ITA 1961 (historical)	Refer to original report
Sweat equity / buy-back	Yes	Companies Act / ITA 2025 provisions	Registered Valuer / SEBI Category I MB (context-dependent)

10. Frequently Asked Questions

Is angel tax completely abolished and does the Income-tax Act, 2025 revive it?

Angel tax under Section 56(2)(viib) of the Income-tax Act, 1961 was abolished effective from Assessment Year 2025-26. The Income-tax Act, 2025, which replaced the 1961 Act entirely from 1 April 2026, does not contain any equivalent provision. The omission is intentional. A share premium in a primary issue will not create angel-tax exposure under any currently operative law.

Does a startup still need a valuation report if it is only raising from domestic investors?

For a primary issue to domestic investors after the abolition of angel tax, there is no income-tax requirement to obtain a valuation report solely on account of the share premium. However, if the issue price is also the benchmark for ESOP grants, if existing shareholders are concurrently selling at a discount, or if the round involves instruments that are subsequently transferred, other provisions may become relevant. The specific transaction structure should be reviewed before concluding that no valuation is needed.

What replaced Rule 11UA after 1 April 2026?

Rule 11UA of the Income-tax Rules, 1962 has been superseded by Rule 57 of the Income-tax Rules, 2026. The NAV formula — (A + B + C + D − L) × (PV/PE) — is preserved in substance. Any valuation report for a transaction on or after 1 April 2026 should reference Rule 57, not Rule 11UA.

What replaced Section 56(2)(x) under the Income-tax Act, 2025?

Section 56(2)(x) of the Income-tax Act, 1961 is replicated as Section 92(2)(m) of the Income-tax Act, 2025. The provision continues to tax the recipient of shares or other property received at a price below Fair Market Value, where the shortfall exceeds ₹50,000. The applicable valuation rule from 1 April 2026 is Rule 57 of the Income-tax Rules, 2026.

Can a Chartered Accountant sign a startup valuation report for tax and FEMA purposes?

For the NAV computation under Rule 57 (secondary transfers, Section 92(2)(m)), the formula is self-computed and does not require a professional certificate. For DCF-based valuations — including ESOP valuations and FEMA-compliant primary issue reports — the valuation must be certified by a SEBI-registered Category I Merchant Banker. A Chartered Accountant who is not also a SEBI-registered Category I Merchant Banker is not authorised to sign these reports.

Are older angel tax demands extinguished by the abolition?

No. The abolition is prospective. Assessments, appeals, and proceedings relating to funding rounds completed before the abolition date continue under the transitional provisions of the Income-tax Act, 2025. Original valuation documentation from those rounds remains relevant and should be preserved.

Talk to a Valuation Specialist

If your funding round, ESOP grant, secondary transfer, or FEMA-compliant issuance needs a valuation report or FMV computation under the current law, we offer a no-charge 30-minute consultation to review your specific transaction structure and confirm which provision applies.

Marcken Consulting LLP — IBBI-Registered Valuer (Securities or Financial Assets)
Website: marckenconsulting.com
Phone: +91 99980 59923 / +91 99985 39902
Email: crm@marckenconsulting.com

Disclaimer: Marcken Consulting LLP is an IBBI Registered Valuer (Securities or Financial Assets, Reg. No. IBBI/RV/07/2021/14408). Where a transaction also requires a Merchant Banker’s certificate, that certificate is issued by a SEBI-registered Category-I Merchant Banker within the same coordinated engagement. This article is for informational purposes only and does not constitute legal or tax advice. Readers should consult a qualified professional before acting on any information contained herein.

Angel Tax Is Gone — Do Startups Still Need Valuation Reports in 2026?

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