The Central Board of Direct Taxes (CBDT) has recommended changes to Rule 11UA and has further decided to issue a separate notice of Excluded Entities1 with regards to "Angel Tax."2 The Finance Act of 20233 included consideration received from non-residents for issuing shares under section 56(2)(viib) of the Income-tax Act of 1961.4 This rule states that if the consideration for shares surpasses their Fair Market Value (FMV), the excess is taxable under the heading 'Income from other sources.' As a consequence of discussions with stakeholders following the amendment, the CBDT has proposed changes to Rule 11UA, which governs the valuation of shares under section 56(2)(viib).

Understanding the Changes

1. Diverse valuation methodologies

As opposed to only the Discounted Cash Flow (DCF) or the book value, i.e., the Net Asset Value (NAV) method, there are now 5 (five) additional valuation methods available to the assessees, i.e., non-resident investors. This recognizes that different businesses may have unique traits and revenue-generating methods, necessitating a tailored valuation method. Businesses may ensure that their value is appropriately portrayed by allowing valuation liberty, enabling fair and accurate decisions of their worth.

2. Price matching between residents & non-residents

The Angel Tax's interplay with the Foreign Exchange Management Act (FEMA) has frequently resulted in a price discrepancy between resident and non-resident investors. Non-residents were barred from purchasing equities below their Fair Market Value (FMV) under FEMA, whilst firms were restricted from issuing shares beyond the FMV due to the Angel Tax implications. Now, the modified provision provides that when a company receives consideration from a non-resident entity notified by the Central Govt in exchange for issuing shares, the price will be based on the FMV, which can be used to determine the applicable share price for both residents and non-residents. This applies to investments made by way of Venture Capital Funds or Specified Funds (Category I or Category II Alternative Investment Funds (AIF)) as well. This is, however, subject to two conditions:

a) The consideration received as per the FMV of the shares should not exceed the total consideration received from the specified non-resident entity.

b) The company must receive the consideration from the specified non-resident entity within 90 days from the date of issuing the shares that are being valued.

3. Tenure of valuation reports

Valuation reports now have a Tenure of 90 days from the previously unspecified time period.

4. Safe Harbour clause of 10% variations

Previously, even a small difference could trigger the Angel Tax. Through this proposed amendment, the government has now specified a 10% variation as acceptable to account for factors such as foreign exchange fluctuations, changes in economic indicators, and variances in bidding processes that can affect the valuation of unquoted equity shares during several investment rounds. It allows for some flexibility to account for such fluctuations and allows for a more flexible valuation method.

5. Enhancing the entities whose investments will not attract Angel Tax

Previously, only AIFs regulated by the Securities Exchange Board of India (SEBI) & International Financial Services Centres Authority (IFSCA) were exempted from the Angel Tax. Now, Category I Foreign Portfolio Investments (FPI) (financial assets backed by the Government), Government bodies, Banks & Insurance companies, Endowment funds of universities, hospitals or charities, Pension Funds & Broad-Based Pooled Investment Vehicle or Funds with more than 50 investors will also be exempted from the Angel Tax.

In addition to this, this provision will not apply to the consideration received by startups mentioned in the Notification dated 19.02.2019 issued by the Ministry of Commerce and Industry in the Department for Promotion of Industry and Internal Trade (DPIIT).5

Industry Observations on the Proposed Draft

  • The industry applauds the efforts to promote balance between residents and non-residents through the proposed amendments to Angel Tax. However, caution is suggested to be exercised since the provisions apply to only non-resident entities notified by the Central Government. Hence, the viability of the provisions has to be determined post such entities being notified.
  • Non-resident investors are relieved by the Central Government's establishment of five new valuation techniques and the right to exclude notified firms. Concerns of potential consequences still exist since the notification does not clearly define any exceptions. However, stakeholders are optimistic that the government will consider making exceptions for certain kinds of investors after obtaining input from the industry players.
  • The proposal to change the provision to exempt enterprises registered with the DPIIT from the Angel Tax is regarded as a positive step forward. However, there are concerns that not all prospective new enterprises would register as startups with DPIIT, exposing their capital raise from non-resident investors to scrutiny. This industry proposes that the CBDT should review this adjustment so that the establishment of new businesses in India is not hampered.
  • The industry supports the proposal to implement a 10% safe harbour to protect unquoted share valuations. The proposal to inform non-resident entities of angel tax immunity and to broaden the list of forbidden businesses to include non-resident entities with 75% government ownership and broad-based pooled investment vehicles are both positive advances. These initiatives have the potential to reduce the burden of angel taxes on a few more Indian start-ups.
  • At the outset, the industry maintains that even though this may reduce the chances of being taxed, the ground-level problems of scrutinizing every investment and engaging tax consultants still remain.
  • In addition, investors have raised concerns about executing and implementing these provisions, especially concerning the excluded entities. Furthermore, experts have highlighted that most early-stage start-ups are non-institutionally funded, and hence, Angel Tax continues to remain a challenge for them. Thus, stakeholders and experts hope that detailed regulations with these rules will make it easier for non-institutionally funded start-ups to take advantage of any exceptions or benefits.


Overall, the proposed changes to Rule 11UA and the Excluded Entities notification are intended to increase share valuation flexibility, implement a safe harbour provision for fluctuations in valuations, increase the list of entities exempted from the Angel Tax, and exclude startups specified in the DPIIT notification. These changes aim to improve the investment climate, limit exploitation, as well as the ambiguity of tax rules, and stimulate company investments while maintaining equal taxation practices.


1. The definition of Exluded Entities includes:

i. Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled by the Government or where direct or indirect ownership of the Government is 75% or more.

ii. Banks or Entities involved in Insurance Business where such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident.

iii. Any of the following entities, which is a resident of a certain countries or specified territories having robust regulatory framework:-

a. Entities registered with Securities and Exchange Board of India as Category-I Foreign Portfolio Investors.

b. Endowment Funds associated with a university, hospitals or charities,

c. Pension Funds created or established under the law of the foreign country or specified territory,

d. Broad Based Pooled Investment Vehicle or Fund where the number of investors in such vehicle or fund is more than 50 and such fund is not a hedge fund or a fund which employs diverse or complex trading strategies.





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