RAS question
Angel tax was related to:
Correct answer: (A) Tax on startup funding received above fair market value.
Angel tax was the tax on startup funding received above fair market value, treated under Section 56(2)(viib) as income from other sources.
Explanation
Angel tax referred to the tax treatment under Section 56(2)(viib) of the Income-tax Act, where share premium received above fair market value was taxed as income from other sources. In exam terms, it was linked to startup funding because the excess investment value could be taxed in the hands of the company rather than being treated simply as capital raised. The PIB note on Budget 2024-25 states that the Finance Minister proposed abolishing angel tax for all classes of investors to support India's startup ecosystem, entrepreneurship and innovation. That is why the best answer is funding received above fair market value, not a tax on the investor's profit.
Why the other options are wrong
- (B) Angel tax was not a tax on angel investors' profits; it applied to excess share premium received by the company and treated as income from other sources.
- (C) It was not simply a tax on foreign investments, because Section 56(2)(viib) concerned investment valued above fair market value rather than foreign investment as a category.
- (D) Donations to temples have no connection with Section 56(2)(viib), startup funding, share premium or fair market value.
Concept
This tests taxation of startup finance under Indian Economy, especially how income-tax provisions can affect capital raising. It recurs in RAS because Budget announcements and startup-policy measures are frequently asked through short concept questions.