Angel Tax Exemption for Startups

The Indian Government has introduced a mechanism for startups to avail tax exemption from “angel-tax”, retrospectively, and avail the tax incentives as per the startup policy. However, the expert opinion is that doing so may not be as easy, considering the conditions imposed. Startups with the total investment up to ₹10 crores, including angel investors funding, can ask for an approval from an eight-member government board, for tax exemption u/s 56 of Income Tax.

A Board has been constituted by the government, which will have representation from SEBI, RBI, CBDT, and the relevant ministries.

The startups are expected to have easier funding access, ensuring ease of starting up, encouraging entrepreneurship, promotion of the startup ecosystem, more job creation, and an overall economic growth.

Section 56, Income Tax Law

As per the provisions of this section, a startup that receives equity infusion in excess of the fair value will attract tax. This excess shall be treated as Other Income under the law and will be taxed accordingly. A number of startups have already received “angel tax” notices.

Now, a startup shall get relief from this tax if certain predefined conditions are met. For instance –

• Aggregate paid-up share capital and share premium after share issue, must not exceed ₹10 crores.
• The startup must obtain a report specifying the fair market value of shares under the Income Tax Rules. This report should be given by a merchant banker.
• Application for certification of startups u/s 56 is to be sent via the online portal of DIPP.
• Angel investor must have an average returned income of ₹25 lakhs or more for the preceding 3 financial years, and a net worth of ₹2 crores or more, as on the last date of the previous financial year.

There is no restriction on eligible startups and the class of investors. Investment can be received from anyone, against an issue of share capital.

Tax Incentive

As per the startup policy, 100% deduction of profits and income gains is allowed for 3 out of 7 consecutive Assessment Years. A startup incorporated post 1st April 2016 and before 1st April 2021, shall be eligible for this tax incentive. An application will have to be made to the Board for a certificate of exemption. A startup set up as an LLP or a Private Limited Company, and incorporated after 1st April 2016, shall be eligible for tax concession.

A company shall have the status of a startup for up to 7 years from the date of incorporation, or for up to 10 years if it belongs to the BioTechnology sector. In the event its turnover in any year exceeds ₹25 crores, it shall lose the tag of a startup.

A startup must work in the direction of innovation and improvement of products and services. If it is a scalable business model, it must work towards employment generation and wealth creation.

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