The angel tax is a 30% tax levied on investments made by external investors in start-ups. It is not that the whole investment is taxed, it is only the amount which is above the “fair market value” (FMV) valuations of the start-up that is classified as ‘income from other sources’ liable to tax under the Income-Tax Act. However, considering the nature of businesses of start-ups, they are valued subjectively using discounted cash flows or taking into account intangibles such as goodwill, brand value, etc. (which are not accounted usually).
Chirag Nangia, Nangia Advisors LLP contributed an article on How angel tax demonises a growing start-up for Financial Express.