Startups in 2026: Angel Tax Is Gone, the Tax Holiday Now Reaches ₹300 Crore, and When ESOP Tax Really Falls Due

There is a particular kind of founder who has read section 56(2)(viib) more times than their own pitch deck. For more than a decade, every priced funding round came with the same worry. If the investors paid more than a valuer thought the shares were worth, the difference could be taxed as the company's income. The tax on growth capital came to be called angel tax.

It is gone now. And the start-up provisions that replaced the worry have quietly become more generous, including one change the Finance Act, 2026 made at the last minute.

Angel tax: switched off, not forgotten

The Finance (No. 2) Act, 2024 added a proviso to section 56(2)(viib): the clause "shall not apply on or after the 1st day of April, 2025". The Income-tax Act, 2025 carries nothing like it. Section 92, the income-from-other-sources chapter, taxes money or property received for no or inadequate consideration, but it has no charge on the premium a company receives for issuing its shares.

One test does survive. Under section 102(3), when a closely held company records share application money, share capital or share premium, its explanation is treated as unsatisfactory unless the resident investor also explains the source of the money, and the Assessing Officer accepts it. The valuation question has gone. The question of where the money came from has not.

The three-year tax holiday, now up to ₹300 crore

Section 80-IAC is now section 140. It gives an eligible start-up a deduction of 100% of its profits for any three consecutive tax years out of ten, counted from the year it was incorporated.

To qualify, the start-up must be a company or LLP that:

• was incorporated on or after 1 April 2016 and before 1 April 2030;
• has a turnover not exceeding ₹300 crore in the year of the claim;
• holds a certificate from the Inter-Ministerial Board of Certification;
• is engaged in innovation, or in a scalable business model with high potential for employment or wealth creation.

The ₹300 crore is new. The Finance Bill, 2026 as introduced didn't touch this limit. The Finance Act as passed raised it from ₹100 crore to ₹300 crore, from 1 April 2026.

Two catches:

• Not in the concessional regimes. A company paying 22% under section 200, or an individual in the default regime, can't claim section 140. A company claiming it under the normal provisions still meets minimum alternate tax, and an LLP alternate minimum tax.
• An audit is required, with the report furnished by the tax audit's specified date.

ESOPs: taxed on exercise, paid up to five years after that tax year ends

This is the provision start-up employees care about most, and the new Act has written it plainly.

• The perquisite. When an employee exercises an option, the difference between the share's fair market value on the date of exercise and the price paid is salary, under section 17(1)(d). For an unlisted company, rule 15 of the 2026 Rules has the value set by a SEBI-registered Category I merchant banker, as on a date not more than 180 days before the exercise.
• The deferral. Where the employer is an eligible start-up, the tax on that perquisite isn't paid with the year's salary. Under section 289(3), it is due within fourteen days of the earliest of:

- sixty months from the end of the tax year of allotment; - the date the employee sells the shares; - the date the employee leaves that employer.

The employer's TDS obligation under section 392(3) moves to the same date.

The deferral fixes the cruellest part of start-up equity, owing tax in cash on shares you cannot yet sell. It does not change how much is owed, only when.

Work out your ESOP

Losses survive a funding round

Normally a closely held company loses its brought-forward losses when more than 49% of the voting power changes hands. For an eligible start-up, section 119(3)(b) keeps them, however much the shareholding changes, provided all the shareholders who held voting shares when the loss was incurred still hold those shares, and the loss arose within ten years of incorporation.

Where this comes from

The angel-tax sunset is section 23 of the Finance (No. 2) Act, 2024. Everything else is the Income-tax Act, 2025 as amended by the Finance Act, 2026, including its section 46, which raised the start-up turnover limit: sections 17, 92, 102, 119, 140, 200, 202, 206, 289, 391 and 392. The valuation rule is rule 15 of the Income-tax Rules, 2026. Section 140 applies only to start-ups certified by the Inter-Ministerial Board. Recognition alone is not enough.