Good news for Startups - No more fear of 'Angel Tax'; know what it was and how the decision will benefit you

In order to promote startups and budding entrepreneurs in the country, the government has eased the tax norms by exempting them from Angel Tax. The tax system is made simpler for startups to claim Angel Tax exemptions even for previous investments including startups incorporated before April 2016, the cut-off date for incentive under the startup policy issued by the government. 

The new incentive will include tax exemption on investments of both past and future investments. However, to claim the tax exemption startups\investors need to apply via DIPP in a prescribed form along with required documents. After that, the Central Board of Direct Taxes (CBDT) will issue a certificate of exemption within 45 days of the application. 

The application will not be mandatory to get clearance from the international committee and fair market valuation certificate from the banker is also not required anymore. However, it will seek a reason for the valuation of shares along with additional document, if any. 

Startups, with a total amount of paid-up share capital and share premium below Rs 10 crore after the proposed issuance of shares, falls under the category of angel tax exemption. However, the government has made mandatory for angel investors to have filed income tax returns of minimum Rs 50 lakh for the year preceding the investment year, in order to curb any money laundering cases in this fashion.  

Also, the net worth of the investor should lie above Rs 2 crore or the amount proposed in the startup, whichever is higher, as on the last date of the financial year preceding the investment year. 

In case, the assessment order has been passed by an assessing officer for the relevant financial year, the investor cannot apply. However, there is a relief for applications under process but where assessment order has not yet issued. 

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What is 'ANGEL TAX' ?

Angel Tax is imposed on the difference between the premium value and fair market value of shares.

Under Section 56 (2) of the Income Tax Act 'Angel Tax' is imposed on the difference in the premium value and fair market value of shares, when the company issues its shares at a price above fair market value and the excess amount is taxable.