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Why is it in the news?

  • Recently, the Indian government has eased some of the provisions of the angel tax introduced in this year’s Budget.
  • The changes pertain to investments into startups by non-resident investors at a premium over their fair market value.

More about the news

  • The Central Board of Direct Taxes has amended Rule 11UA under the Income Tax Act, bringing some relief to prospective foreign investors in startups.
  • The amendments introduce five different valuation methods for shares and offer a 10% tolerance for deviations from accepted share valuations.
  • Previously, equity shares could only be valued based on Net Asset Value (NAV) and Discounted Free Cash Flow methods.
  • These changes provide more flexibility to merchant bankers for the valuation of startup companies.
  • The option to value equity shares using any of the five methods is not available to resident investors.
Angel Tax

路聽聽聽聽聽聽 The provision known as the ‘angel tax’ was initially introduced in聽2012聽to聽discourage the generation and utilization of unaccounted money through investments in closely held companies.

路聽聽聽聽聽聽 It is the聽tax that must be paid on the funds raised by unlisted companies聽through the聽issuance of聽shares聽in off-market transactions, if they exceed the聽fair market value of the company.

路聽聽聽聽聽聽 Fair market value (FMV)聽is the price of an asset when聽buyer and seller have reasonable knowledge of it聽and are willing to trade without pressure.

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