An angel investor is usually a high-net-worth individual who funds start-ups at the early stages, often with their own money. Angel investing is often the primary source of funding for many start-ups who find it more appealing than other, more predatory, forms of funding.
When an unlisted company, such as a start-up, receives equity investment from a resident or non-resident investor for issue of shares that exceeds the fair value of such shares, it will be counted as income for the start-up and be subject to income tax under the head ‘Income from other Sources’ for the relevant financial year.
Explanation: If you are investing in a company whose shares are listed and traded on a stock exchange then you get the shares at a price which is considered fair. There is no way to manipulate the share price as it is taken from the market at which it is traded. But what if a company’s shares are not listed on a stock exchange and not traded??
So, let us say there is a startup (unlisted) ABC which garners Rs. 30 crore from issuing 75000 shares to investors at Rs .4000 per share. But suppose the fair market value was calculated to be Rs. 1000 per share. So the excess funds received by the company i.e. (Rs. 4000 – Rs. 1000)*75000 = Rs. 22.5 crore will be treated as income and the company will have to pay Angel Tax on Rs. 22.5 crore as per Income Tax Act 1961. No need to go in further detail.