ANGEL TAX AND CAPITAL GAIN TAX

Introduced in 2012, the 'angel tax' was subsequently enlarged by the Finance Act of 2023, with the aim of discouraging the creation and utilization of unexplained funds by means of investments in closely held businesses.

• Angel Tax, formally known as Section 56 (2) (vii b) of the Income Tax Act, 1961, taxes funds raised by startups if they exceed the fair market value of the company.

• It is levied on the capital raised via the issue of shares by unlisted companies if the share price of issued shares is seen in excess of the fair market value of the company.

• Fair market value is the price of an asset when the buyer and seller have reasonable knowledge of it and are willing to trade without pressure.

• Angel tax is income tax at the rate of 30.6 per cent.

Finance Act, 2023 Amendment:

• Expanded the angel tax provision to include foreign investors from April 1, 2024.

• Start-ups receiving equity investment exceeding face value are taxed as 'Income from Other Sources.'

• DPIIT-recognized start-ups were initially exempt from this provision.

Recent Exemption:

Due to industry pushback, the Finance Ministry exempted investors from 21 countries, including the US, UK, and France, from the Angel Tax for investments in Indian start-ups.

Funding Winter and Job Losses:

• In 2023, Indian start-ups experienced over a 60% decline in funding compared to previous years.

• Resulted in layoffs exceeding 15,000 employees across the sector.

The Confederation of Indian Industry (CII) and other stakeholders have called for the removal

of Section 56(2) of the Income-tax Act, 1961, commonly known as Angel Tax.

Capital Gain Tax:

• Capital Gain: Profit or gain from the sale of a capital asset is categorized as capital gain and is considered income.

• Capital Gains Tax: Tax is applicable in the year the capital asset is transferred.

Types of Capital Gains:

• Long-Term Capital Gains (LTCG): Applies to assets held for over 36 months.

• Short-Term Capital Gains (STCG): Applies to assets held for less than 36 months.

In the case of immovable properties, the duration is 24 months.

Capital Loss Deduction: Capital gains can be reduced by capital losses (losses from selling an asset below its purchase price). The resulting amount is called "net capital gains."

Tax Realization: Capital gains tax is triggered only upon the sale of the asset, not while the asset appreciates in value.