ANGEL INVESTORS IN START-UPS GET INCOME TAX EXEMPTION

The tax department exempted angel investors from income tax on their investments in start-ups with effect from April 11. Angel tax’ shall not be levied, where the business is an approved start-up and has obtained valuation from a merchant banker.

  • 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 start-ups above fair market value.
  • Start-up can seek tax concession under the section 56 of I-T act. The section 56 provides for taxation of funds received by an entity.
  • The tax concessions are subject to certain conditions which said that the share capital and share premium of the start-up should not exceed Rs 10 crore after such investments.
  • Also the angel investor who plans to subscribe the shares in the start-up will have to fulfil prescribed criteria and the start-up 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, and omitted the word ‘accountant’.
  • The decision to give investors in start-ups exemption from income tax was aimed at addressing a key issue faced by angel investors who put money during early growth stage, and would also provide level-playing field for all investors.

An angel investor is the one who put funds in a startup when it is taking baby steps to establish itself in the competitive market. The government launched the ‘Start-up India’ initiative on January 16, 2016, to build a strong ecosystem for nurturing innovation and entrepreneurship
Angel tax of about 30% is levied on the amount that exceeds the fair market value of shares issued by unlisted companies, which is treated as income from other sources.
LEARNING WITH TIMES
STARTUP COMPANY
A company that is in the first stage of its operations; where the entrepreneur moves from the idea stage to securing financing, laying down the basis structure of the business. These companies are often initially bank rolled by their entrepreneurial founders as they attempt to capitalize on developing a product or service for which they believe there is a demand. Due to limited revenue or high costs, most of these small scale operations are not sustainable in the long term without additional funding from venture capitalists.
VENTURE CAPITALIST
Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

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