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Start-ups registered with the Department of Industrial Policy and Promotion of the Government of India are exempted from the payment of the "Angel Tax" with conditions. This tax refers to
1. Tax payable on capital raised by new listed start-up companies via issuance of shares where the share price is seen in excess of fair market value of shares sold.
2. The tax that start-up were supposed to pay if they receive a loan at a discounted rate of interest because of higher success ratio.
3. Tax payable on capital raised by unlisted companies via issuance of shares where the share price is seen in excess of fair market value of shares sold.
4. The tax that start-ups were supposed to pay when their annual income would cross the specified threshold as per their fair market valuation.

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Correct Answer - Option 3 : Tax payable on capital raised by unlisted companies via issuance of shares where the share price is seen in excess of fair market value of shares sold.

The correct answer is Tax payable on capital raised by unlisted companies via issuance of shares where the share price is seen in excess of fair market value of shares sold.

  • Angel Tax in India was introduced in the 2012 Union Budget by then finance minister Pranab Mukherjee to arrest and stop the laundering of funds.
  • It has come to be called angel tax since it largely impacts angel investors in start-ups.
  • Section 56(2)(viib) of the Income Tax Act, 1961 is the core section of Angel Taxation. Angel taxation is only a terminology given to tax levy under the abovementioned section.
  • Angel Tax is a term basically used to refer to the income tax payable on the capital raised by unlisted companies via the issue of shares through off-market transactions.
  • Angel tax is levied on the capital raised via the issue of shares by unlisted companies from an Indian investor if the share price of issued shares is seen in excess of the fair market value of the company.
  • The startup community opposing Angel Tax:
    • The imposition of angel tax hinges on the fair market valuation of the company and this has been a bone of contention between startups and the income tax department.

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