Definition tweaked, startups can seek exemption from angel tax

NEW DELHI | BENGALURU: The government has refined the definition of startup and put in place a mechanism for such companies to secure exemption from the so-called ‘angel tax’ with retrospective effect and avail tax incentives under its startup policy.

Experts, however, said availing exemption may not be easy given the conditions imposed.

Startups with total investment including funding from angel investors up to Rs 10 crore can seek approval from an eight-member government board for exemption from tax under Section 56 of the income-tax law, the government said in a notification issued on Thursday.


The government has also constituted a board that will have representation from the Reserve Bank of India, stock market regulator Sebi, Central Board of Direct Taxes and the relevant ministries.

The government said startups are likely to have easy access to funding, which in turn will ensure ease in starting of new businesses, promote startup eco-system, and encourage entrepreneurship, leading to more job creation and economic growth.

Tough conditions
Under Section 56 of I-T law, a startup receiving equity infusion in excess of fair value faces tax. The law treats such equity infusion as other income and is accordingly taxed. Many startups have already received tax notices for this ‘angel tax’.

Now, a startup will be spared this tax if it meets specific conditions. For example, the aggregate amount of paid-up share capital and share premium of the startup after the issue of shares should not exceed Rs 10 crore.

The startup should also obtain a report from a merchant banker specifying fair market value of shares under income-tax rules.

The angel investor should have average returned income of Rs 25 lakh or more for preceding three financial years and net worth of Rs 2 crore or more as on the last date of the preceding financial year.

Applications for certification of startups under Section 56 are to be submitted through online portal to DIPP for consideration of the inter-ministerial board.

There is no restriction on class of investors and eligible startups. They can receive investment from any person against issue of share capital.

Industry said requirement of approval from a merchant banker specifying the fair market value of shares is a big hurdle and paperwork and expenses will rise for those wanting exemption. “How will a merchant banker know what is the next GoogleRs ” said Padmaja Ruparel, president of Indian Angel Network.

Vinod Murali, managing partner at Alteria Capital, said, “While a certification on fair market value is necessary under Company Law, usually companies get it through a chartered accountant. With a merchant banker, the costs may go up.”

Investors, however, said the clauses for investment and net worth and Rs 10-crore threshold are appropriate.

Tax incentive and definition
Under the startup policy, 100% deduction of profits and gains from income is allowed for three out of seven consecutive assessment years under 80 IAC of the Act.

A startup incorporated after April 1, 2016 but before April 1, 2021, will be eligible for this tax incentive. It would need to make an application to the board for certificate of exemption.

Startups set up as private limited company or limited liability partnership and incorporated after April 1, 2016, would be eligible for tax concessions.

A company will enjoy the status of startup up to seven years from the date of incorporation, or up to 10 years if it’s in biotechnology sector. But it will lose its startup tag should its turnover in any year exceed Rs 25 crore.

It must work towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.