If a startup issues equity shares at a price exceeding their fair market value (FMV), the excess amount was earlier taxed as income under Section 56(2)(viib) of the Income Tax Act. However, the Finance Act, 2024, abolished this provision, commonly known as the “Angel Tax.”

Now, startups are no longer liable to pay tax on the excess amount received over FMV for equity share issuance. This change aims to encourage investments in startups without tax burdens on fundraising activities.

Previously, eligible startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) were exempt from this tax under certain conditions. While this exemption is now redundant due to the abolition of Section 56(2)(viib), startups should still comply with regulatory guidelines for share issuance.

This legislative change significantly enhances the startup ecosystem by providing more flexibility in raising capital without additional tax implications.

Section 115BB of the Income Tax Act, 1961 – Tax on winnings from lotteries, crossword puzzles, card games, and other games of any sort or gambling or betting:

“Where the total income of an assessee includes any income by way of winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever, the income-tax payable shall be the aggregate of—
(a) the amount of income-tax calculated on such income at the rate of 30%, and
(b) the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of such income.”

Rate of Tax:

• Flat 30% on the gross winnings (without any basic exemption limit).

• Surcharge and cess (currently 4%) are added to the 30% tax.

• No deduction of expenses or allowances is permitted against such income.

• No benefit of slab rates or chapter VI-A deductions (like 80C, 80D, etc.) on this income.

TDS Deduction – Section 194B:

“If the winnings from lottery or game show or puzzle exceeds ₹10,000, the payer shall deduct TDS @30% before making the payment.”

• For cash winnings, TDS is deducted directly.

• For non-cash winnings (like car, bike, etc.), the winner must pay tax equivalent to the fair market value of the prize before claiming it, or the provider pays it on their behalf (grossing up required).

As per Section 2(22) of the Income Tax Act, 1961, dividend includes both actual and deemed dividends.

This refers to any distribution by a company out of its accumulated profits (whether capitalized or not), whether in cash or otherwise, to its shareholders.

Example: Final dividend, interim dividend declared by a company to its equity shareholders.

Deemed Dividend [Clauses (b) to (e) of Section 2(22)]

Even if not expressly called “dividend”, the following distributions are deemed to be dividend and are taxable under the Income Tax Act:

🔹 (b) Distribution of debentures or deposit certificates to shareholders:

“Any distribution to shareholders of debentures, debenture stock, or deposit certificates in any form, to the extent it is out of accumulated profits.”

🔹 Tax Treatment: Treated as dividend income.

🔹 (c) Distribution on liquidation:

“Any distribution made to shareholders at the time of liquidation to the extent of accumulated profits (before liquidation).”

🔹 Important: Capital returned in excess of accumulated profits is not treated as dividend.

🔹 (d) Distribution on reduction of capital:

If a company reduces its share capital and pays back shareholders out of accumulated profits, such amount is treated as dividend.

🔹 (e) Loans and advances to shareholders (Deemed Dividend):

This is one of the most litigated and important clauses.

If a closely held company (i.e. company in which public is not substantially interested) gives a loan or advance to:

• A shareholder holding ≥10% voting power, or

• Any concern in which such shareholder is substantially interested
  — then the loan/advance amount is treated as dividend to the extent of accumulated profits.

🛑 Exception: It does not apply to a company in which the public is substantially interested (i.e., a listed company).

📝 Clarification – What is NOT a Dividend (Section 2(22), Provisos):

• Any distribution out of share premium account (Section 52 of Companies Act) – not considered dividend.

• Buy-back of shares u/s 77A of Companies Act, 1956 – not treated as dividend, but subject to capital gains tax.

• Distribution made on preference shares, unless covered under clause (a) to (e) – not deemed dividend.