Angel Tax Is Gone. These 11 Tax and Compliance Traps Still Blow Up Indian Startup Rounds in 2026

When angel tax was abolished, a lot of founders crossed tax off their fundraising checklist. That was premature. In diligence, tax and compliance findings are still among the most common reasons rounds slow down, get re-priced or pick up specific indemnities. None of them are exotic. They are the ordinary compliance gaps of a company that grew faster than its back office.

This is the checklist, in the order investors' lawyers and accountants tend to find the problems.

The 11 traps at a glance

1. Private placement done informally

Every issue of shares or convertibles to investors (other than a rights issue or bonus) is a private placement under Section 42 of the Companies Act. The process is specific: a special resolution, a private placement offer letter (Form PAS-4) to named persons, money received only from the investor's own bank account into a separate bank account, allotment within 60 days of receipt, and a return of allotment (Form PAS-3) within 15 days of allotment. The money cannot be used until the return of allotment is filed.

2. The wrong valuation report

A preferential allotment under the Companies Act needs a valuation by a registered valuer. Shares issued to non-residents need a fair value certificate under FEMA from a chartered accountant, SEBI-registered merchant banker or practising cost accountant. Founders sometimes arrive at diligence with one report that meets neither requirement, or a report dated months before the allotment. Commission the valuation once the term sheet is signed, and brief the valuer on both purposes.

3. FEMA for foreign money

If any investor is a non-resident, including an NRI investing on a repatriation basis or a foreign fund:

• The issue price must not be below fair value, and for convertibles the conversion price or formula must be fixed upfront.
• Shares must be allotted within 60 days of receiving the money, or the money refunded within 15 days after that.
• The allotment must be reported to the RBI on Form FC-GPR within 30 days.
• Investors from, or beneficially owned from, a country sharing a land border with India need prior government approval. Ask foreign funds to confirm their beneficial ownership in writing.

Late filings can be regularised with late submission fees or compounding, but an unresolved FEMA issue will stop the next foreign investor from closing.

4. Where did your angels' money come from?

For closely held companies, the tax law allows the tax officer to treat share capital and premium as unexplained income of the company if the investor cannot satisfactorily explain the source of their money. The rate on unexplained credits is punitive: 60% plus surcharge and cess. Investments by SEBI-registered venture capital funds are carved out. Individual angels are not.

5. Losing your tax losses when the cap table changes

A closely held company can carry forward business losses only if shareholders holding at least 51% of the voting power on the last day of the year of loss also hold at least 51% on the last day of the year the loss is set off (Section 79 of the 1961 Act). A pre-Series A or Series A that moves control can wipe out years of accumulated losses for tax purposes.

There is a relief for eligible startups: losses from the first ten years survive as long as every shareholder who held voting shares in the loss year continues to hold those shares. A founder or angel selling a secondary in the round can break it. But "eligible startup" here means a DPIIT-recognised startup that also holds the inter-ministerial board certificate for the tax holiday. Most consumer startups do not. And because preference shares carry limited statutory voting rights, how investors' CCPS count toward "voting power" before conversion is a point to check with your adviser.

6. Secondary sales at the round

When founders or early angels sell shares to incoming investors, two rules matter. If the buyer pays less than the fair market value computed under the tax rules, the buyer can be taxed on the difference (Section 56(2)(x)), and the seller can be taxed as if they received fair market value (Section 50CA). Secondary deals at a discount to the primary round price, which are common, need a fair value report that supports the price.

For the seller, gains on unlisted shares held more than 24 months are long-term and taxed at 12.5% without indexation. If the buyer is a non-resident, they must deduct tax before paying you. Founders selling a meaningful secondary should also look at reinvestment reliefs, such as the exemption for investing net sale proceeds in one residential house, within its limits.

7. ESOP exercise done without TDS

When employees exercise options in an unlisted company, the gain over exercise price is a salary perquisite. The company must get a fair market value from a merchant banker for that date and deduct tax at source. Diligence often finds exercises where no valuation was obtained and no TDS deducted, or ex-employees who exercised and left with the tax unpaid. More on ESOPs in The ESOP Top-Up Trap.

8. Influencer barter: the consumer brand blind spot

Since July 2022, a business providing a benefit or perquisite worth more than ₹20,000 in a year to a resident in connection with their business or profession must deduct 10% TDS (Section 194R). Products given to influencers for content, retained by them, are a benefit. So are sponsored trips. Consumer brands that send ₹30 lakh of product to creators every year without deducting TDS have a default that grows every quarter.

9. GST reconciliation

Investors reconcile three numbers: revenue in your books, outward supplies in your GST returns (GSTR-1 and GSTR-3B) and settlement reports from marketplaces. They also check input tax credit claimed against what suppliers reported (GSTR-2B). Mismatches of more than a few percent, open demand notices or large unexplained credit balances lead to questions and sometimes specific indemnities. For marketplace sellers, the 0.5% GST TCS and 0.1% income tax TDS deducted by e-commerce operators should be tracked and claimed; unclaimed amounts are simply lost cash.

10. Demat and share records

Private companies that are not small companies must issue securities only in dematerialised form, and holders must hold their shares in demat before they can transfer or subscribe to more. From 1 December 2025, a small company is one with paid-up capital up to ₹10 Cr and turnover up to ₹100 Cr. Many funded startups are still small companies, but many are not, and any subsidiary or holding structure can change the answer. Check your status early; getting an ISIN and converting existing holdings takes weeks.

Separately, investors check the basics: share certificates, register of members, every allotment backed by board and shareholder resolutions and filings, every transfer approved and stamped.

11. Stamp duty

Issue of shares attracts stamp duty of 0.005% of the consideration, and transfers 0.015%, collected through the depository system or paid separately for physical shares. Shareholders' agreements and share subscription agreements are stamped under state law. Unstamped or under-stamped agreements are not admissible as evidence until duty and penalty are paid.

A note on buybacks

From 1 April 2026, share buybacks are taxed as capital gains in shareholders' hands, with an additional tax for promoters, replacing the treatment introduced in October 2024 that taxed the whole buyback amount as dividend. If your round includes a buyback to give early employees or angels liquidity, recheck the tax for each group, especially founders who count as promoters.

Related: CCPS, CCDs, Convertible Notes or iSAFE? and Why Good Brands Fail Due Diligence. Planning a round in the next six months? Send us your deck and we will tell you what diligence is likely to find.

Read next: the deposit rules for loans from friends and directors and the Section 80-IAC tax holiday. Preparing to raise? See how our seed and angel round support works.