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CBDT exempts angel investors from income tax

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By IE&M Research

Central Board of Direct Taxes (CBDT) has decided to exempt angel investors from income tax on their investments in startups with effect from April 11 this year. The exemption is linked to the conditions approved by an inter-ministerial board that defines such concession for share capital and share premium of the startup not exceeding Rs 10 crore. Also, the angel investor who plans to subscribe the shares in the startup will have to fulfil prescribed criteria and the startup will have to procure a report from a merchant banker, specifying the fair market value of the shares in accordance with Income Tax rules. The CBDT has also amended Rule 11 UA (2) (b) of I-T Act, thereby making merchant banker valuation compulsory for the purpose of determining fair market value of unquoted equity shares.

Several startups had raised concerns over taxation of angel funds under Section 56 of the Income Tax Act, which provides for taxation of funds received by an entity. As many as 18 startups had received notices from tax authorities. This section provided that where a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged to tax the company as income from other sources.

The I-T department notification dated May 24 superseded its June 2016 notification and it will come into effect retrospectively from April 11,2018. According to the notification, an angel investor with a minimum net worth of Rs 2 crore or an average returned income of over Rs 25 lakh in the preceding three financial years would be eligible for 100 per cent tax exemption on investments made into startups above fair market value.

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