Angel Tax Exemption – Everything You Need To Know



Latest Update:

The CBDT vide notified the class or classes of persons to whom the provisions of section 56(2)(viib)of the Income Tax Act, 1961  do not apply as per the notification of 24/05/2023.

In the exercise of the powers conferred by Section 56(2)(viib) sub-clause (ii) the Central Government hereby notifies the following class or classes of persons, for
the purposes of the said clause, namely:-
1. Government and Government related investors such as central banks, sovereign wealth funds, international or multilateral organizations or agencies including entities controlled by the Government or where direct or indirect ownership of the Government is 75% or more;
2. Banks or Entities involved in Insurance Business where such entity is subject to applicable regulations in the
country where it is established or incorporated or is a resident;
3. Any of the following entities, which is a resident of any country or specified territory listed in Annexure, and such entity is subject to applicable regulations in the country where it is established or incorporated or is a resident:

(a) entities registered with the Securities and Exchange Board of India as Category-I Foreign Portfolio
Investors;
(b) endowment funds associated with a university, hospitals, or charities;
(c) pension funds created or established under the law of the foreign country or specified territory;
(d) Broad Based Pooled Investment Vehicle or fund where the number of investors in such vehicle or fund
is more than fifty and such a fund is not a hedge fund or a fund that employs diverse or complex trading strategies.

The start-up must provide them with a specific portion of the investment if the overall investment value exceeds the fair market value (FMV), according to the statute that governs angel tax. The additional investment that the start-up receives is viewed as income, which is the foundation of the angel tax. Thus, a start-up is required to pay the angel tax as part of its income tax under Indian Income Tax regulations.

When an unlisted firm issue shares to an investor at a price above their fair market value, angel tax (income tax at a rate of 30.6%) is paid. It used to be restricted to investments made by residents of the country

Steps To Avail Of The Angel Tax Exemption

Availing an angel tax exemption involves a series of steps, from the registration process to compliance and reporting.

Registration Process

Startups seeking angel tax exemption must register with the DPIIT through their Startup India portal. The registration process requires providing essential details about the startup, such as incorporation documents, business models, and details of the founders and directors.

Documentation Requirements

To avail themselves of the angel tax exemption, startups must provide appropriate documentation to support their claim. This includes investment agreements, share subscription details, and valuation reports. It is crucial to ensure that all documentation is accurate, complete, and in compliance with regulatory requirements.

Compliance And Reporting

Once a startup is granted an angel tax exemption, it is essential to comply with the reporting obligations. Startups must file the requisite forms and reports with the relevant authorities to maintain their exemption status. Regular compliance ensures that startups continue to enjoy the benefits of the exemption and avoid any penalties or complications.

Benefits and Implications

The angel tax exemption provides startups with several benefits. Firstly, it eliminates the tax burden on the excess premium paid by investors, thereby facilitating a smoother flow of funds into the startup ecosystem. It also encourages domestic investment and attracts foreign investors looking to invest in the Indian startup market.

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