With over 60,000 startups, India is home to the world’s third largest startup ecosystem. As an angel investor if you invest in the early stages, then you can reap many startups investment benefits.
An angel investor can typically acquire 25%-30% of the equity share in the start-up in exchange for the funding. So, if you wish to join the bandwagon of angel investors in Indian startups, it’s important to understand income tax regulations and angel tax exemption.
Understanding Angel Tax in India
Angel Tax in India is a tax imposed under Section 56(2) (viib) of the Income Tax Act 1961 on the capital generated from an Indian investor through the issuance of shares by unlisted firms if the share price of the issued shares exceeds the company’s fair market value. The extra profit is treated as income and is taxed at a rate of 30.9%.
For example, if your firm obtains an investment of Rs. 10 crores in exchange for issuing shares, and the Fair Market Value of these shares is Rs. 5 crores, the remaining Rs. 5 crores would be deemed surplus money, and will be taxed at a rate of 30.9 percent.
Income tax rules for Angel Investors:
· The investment must be in the range of INR 25 lakh to INR 5 crore.
· For the next three years, the money will be locked in.
· The investment should not be more than 25% of the entire amount invested.
· Funds cannot be invested in associates by investors.
· The startup or firm must have a turnover of less than INR 25 crore.
Angel tax exemption in India
A startup and its angel investors may apply for Angel Tax Exemption only if the startup is deemed as an ‘eligible startup’.
Following conditions must be met by the startup:
· After issuing the shares, the maximum paid-up capital and share premium for the startup is INR 10 crore.
· According to Rule 11 UA (2)(b) of the Income Tax Act of 1961, the fair market value of the startup must be confirmed by a merchant banker.
· The angel investor’s net worth should be at least INR 2 crore.
· The angel investor’s average income over the last three financial years should be more than INR 50 lakh.
If a startup or angel investor wants to file for an angel tax exemption in India, they must first get clearance from an eight-member inter-ministerial body overseen by the Department of Industrial Policy and Promotion (DIPP). The Central Board of Direct Taxes (CBDT) will then have to approve the proposal.
Angel Tax Benefit
Angel investors can benefit from the following income tax exemptions:
Section 56(2) (viib)
As per Angel Tax Section 56(2) (viib) of the Internal Revenue Code, Angel investors are qualified for an income tax exemption. This means that they will only have to pay taxes on the amount by which the total amount received from the issuance of the startup’s shares exceeds the fair market value.
This taxable difference will be reported as “other sources of income.” However, for this rule of exemption to be applied, the total amount of the startup’s paid-up share capital and share premium must be less than INR 25 crore.
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Another huge angel tax benefit comes from Section 79 which states that losses from the previous fiscal year must be written off before the current fiscal year and cannot be carried over.
This structure was put in place to prevent cheating taxpayers from feigning a loss-forefront to their firm in order to get tax breaks while still making money in the backside. It protects angel investors since it only applies when a significant portion of the company’s ownership is transferred to someone from the same group.
Section 54GB of the income Tax Act exempts investors from capital gains on the transfer of a residential plot if they invest the same amount in startup equity shares.
Tax deduction provisions under Section 80-IAC of the IT Act specify that profits will be deducted at 100% for three out of seven consecutive assessment years.
Angel investors can also receive access to the CBDT’s startup cell, which is dedicated to resolving challenges.
Investing advice for newbies
If you’re considering becoming a professional angel investor, bear in mind that excess investments are subject to a steep 30.9 percent angel tax (over the fair share market value). However, the average internal rate of return on investment (ROI) in this domain is 22 percent, showing that it is profitable.
Before you invest in a business, make sure you have a solid exit strategy in place, as well as acquisitions or even IPOs as shock absorbers. Get to know the laws and regulations that apply, and make sure that your project meets all of the requirements.
Coffeemug.ai provides an ideal platform for start-ups and investors to explore expansion potential by connecting them with seasoned mentors who can help them navigate funding opportunities and advice on angel tax exemption.
Q. Is it necessary for startups to pay taxes?
A. The government has waived the tax on investments in qualifying startups that exceed their fair market value. These contributions might come from local angel investors, relatives, or funds that aren’t recognized as venture capital funds.
Q. What is the procedure for claiming the 80IAC exemption?
A. Criteria for applying for the 80IAC (Income Tax Exemption): The company should be a well-known startup. Section 80IAC only applies to private limited companies and limited liability partnerships. After April 1, 2016, the startup should have been incorporated.
Q. What is the definition of Startup form 2 declaration?
A. On its e-filing system, CBDT has made it possible for a startup to examine Form 2 Declarations submitted with DPIIT (Department for Promotion of Industry and Internal Trade). Form 2 (Section 56 Exemption Statement) is a declaration by a startup that it is eligible for an exemption under Section 56(2) (viib) of the Income Tax Act of 1961.
Q. What are the advantages of being recognized as a startup?
A. Tax exemption is the biggest advantage of being an eligible startup.
Q. How can I become recognized by DPIIT?
A. With the help of following these steps:
1. Go to the Startup India website
2. Enter entity data
3. Enter full office address
4. Enter authorized representative information
5. Next, enter the details for directors and partners
6. Enter other information
7. Enter Startup India details.
8. Self-certification should be uploaded