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Direct Tax Alert - CBDT notifies persons exempt from ‘Angel Tax’ related provisions

26 May 2023


As per Section 56(2)(viib) of the Income-tax Act, 1961 (IT Act), where the premium is received in excess of fair market value (FMV) by closely-held companies from the resident investor(s), such excess is taxed in the hands of recipient Company. Finance Act 2023 has extended the application of this section to shares issued to non-resident investor(s) as well. An exemption from applicability of section 56(2)(viib) of the IT Act is provided to venture capital undertaking (if received from venture capital company or venture capital fund) and Company (if received from specified class(es) of the person notified by the Central Government). In this regard, the Central Board of Direct Taxes (CBDT) has recently issued two notifications1 wherein it has notified class or classes of persons to whom section 56(2)(viib) of the IT Act shall not apply. We, at BDO in India, have analysed and summarised the said notifications and provided our comments on its impact hereunder:

1. Which are the taxpayers exempted from the applicability of section 56(2)(viib) of the IT Act?

As per Notification No. 29/2023, where the consideration for the issue of shares is received by a Company from:

  • Government or Government related investors such as central banks, sovereign wealth funds, international or multilateral organisations or agencies including entities controlled by the Government or where direct or indirect ownership of the Government is 75% or more;
  • Bank or Entities involved in the Insurance business being subjected to applicable regulations in the country where it is established or incorporated or is a resident;
  • Any of the following entities, being resident of any specified country or territory, and such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident-
    • Entities registered with the Securities and Exchange Board of India as Category-I Foreign Portfolio Investors;
    • Endowment funds associated with a university, hospitals or charities;
    • Pension funds created or established under the law of the foreign country or specified territory;
    • Broad-based Pooled Investment Vehicle or fund wherein the number of investors is more than 50 and the such fund is not a hedge fund or fund which employs diverse or complex strategies.

2. Which are the specified countries/territories for the purpose of Notification No. 29/2023?

The list of Specified Country/territories is tabulated hereunder:





Czech Republic










New Zealand





United Kingdom

United States

3. Notification No. 13/2019 dated 5 March 2019 granted relaxation to DPIIT Start-ups from angel taxation subject to fulfilment of specified conditions. Said notification referred to resident investors. With Finance Act, 2023 extending the applicability of section 56(2)(viib) of the IT Act to shares issued to non-resident investors, whether such DPIIT Start-ups will get covered by section 56(2)(viib) of the IT Act?

CBDT has issued Notification No. 30/2023 dated 24 May 2023 which shall supersede Notification No. 13/2019. This Notification provides that where consideration has been received from any person, by a company which fulfils the conditions pertaining to the exemption of recognised startups as mentioned in the DPIIT Notification2 dated 19 February 2019. In other words, the relaxation granted to DPIIT startups is also extended to shares issued to non-resident investors. It may be noted that while this Notification is issued on 24 May 2023, it shall be deemed to be effective from 1 April 2023.

BDO in India comments:

This is a welcome notification from the CBDT. As per recent RBI’s Press Release3, for Fiscal Year 2021-22, Companies with direct investment from Mauritius, Singapore and the USA accounted for nearly half of the sample companies; Netherlands, Japan, the United Kingdom and Germany were other major direct investment sources. It is observed that from the list of 21 notified countries, the name of countries like Singapore, Mauritius and Netherlands is conspicuously missing. Thus, investment by Foreign Portfolio Investor from these countries entities will not enjoy the relaxation and thereby the Company(ies) who issues shares to such entities need to pay tax if the amount received by the Company is in excess of FMV. With two major countries kept out of the notified list, one needs to see the impact of FDI in India.

It is also pertinent to note that recently CBDT issued a Press Release4 stating that the existing Rule for Valuation of Shares will be amended and the revised Rule will be shared for public comments for 10 days. The said Press Release also provided that a notification exempting certain classes of persons will be notified. While the exempt person has been notified, one needs to wait and watch whether the issue revolving around Valuation is addressed by the amendment in Rules.

1 Notification No. 29 and 30/2023, dated 24 May 2023

2 Refer our tax alert

3 RBI Press Release on Finances of FDI Companies, 2021-22 dated 31 March 2023

4 Press Release dated 19 May 2023