Angel tax regime: Draft rules give investors more valuation flexibility

India on Friday announced draft valuation rules for overseas investments into startups under the ‘angel tax’ regime, providing foreign investors greater flexibility in determining the fair market value of unquoted equity shares.

The rules released for public feedback offer investors the choice of five valuation methods for determining angel tax incidence under Section 56(2)(vii)(b) of the Income Tax Act 1961, which should help reduce valuation disputes common under the cash flow method and net asset value method allowed earlier.

Tax experts, however, said the proposed norms mention only equity shares, leaving out instruments such as compulsorily convertible preference shares (CCPS) used extensively to inject capital into startups.