Angel Tax Exemption

Angel Tax Exemption In India
(Price Start at $ 91 /-)

Generally speaking, "angel tax" refers to a tax on capital raised by unlisted corporations from any individual against the issuance of shares that are more than their fair market value. This idea is especially pertinent when discussing startup financing. Concerns have been raised over the valuation of startup shares in various nations, including India, particularly when those companies obtain money from venture capitalists or angel investors. Tax authorities may closely examine these kinds of transactions to make sure that the shares are valued at fair market value. The excess money may be classified as startup income and liable to taxation if the tax authorities determine that the shares were issued at a valuation greater than the fair market value.

The idea of an angel tax is covered in Section 56(2) (vii) (b) of the Income Tax Act of 1961. Every startup (i.e., unlisted businesses whose shares are not available for purchase on the stock market) that obtains investment from an angel investor is required under the Finance Act, 2012, in the IT Act to provide a specific amount of contributions to the government. When discussing angel investors, individuals who donate money to firms in exchange for ownership equity the phrase "angel tax" is frequently used. Taxing the extra premium on share valuation raises concerns since it would deter angel investors from funding firms. It's important to keep in mind that each country may have different laws and regulations governing angel taxes. In a broader sense, the word can also be used to describe any tax on investment profits or income from angel investing. For accurate and current information, always refer to the specific tax legislation in the applicable country.

Eligibility Criteria for Angel Tax Exemption in India

To claim startup tax exemption under section 56 (2)(vii) (b) the following steps need to be followed:

  • Startup Recognition: The Department for Promotion of Industry and Internal Trade (DPIIT) must acknowledge the startup as eligible in order to grant an angel tax exemption. Based on a number of factors like the type of business, creativity, and creation of new goods and services, this recognition is given.
  • Turnover Limit: In the fiscal year prior to receiving the angel investment, the startup's revenue must have totaled no more than Rs. 25 crores.
  • Technology and Innovation:The startup should be focused on developing, implementing, or commercialising novel goods, procedures, or services that are powered by intellectual property or technology.
  • Angel Investor Requirements:Generally, the exemption is granted in cases when a specific class of angel investors makes the investment. Angel investors may have requirements such as a minimum net worth or a minimum average return on investment.
  • Fair Market Valuation:The startup must be valued using the recommended methodology, and the valuation report must be turned in to the tax authorities
  • Application for Exemption:The Inter-Ministerial Board of Certification must receive an application for angel tax exemption from the startup and its investors. During the application process, the startup must submit supporting documentation and information.

The Documents/Compliances required to get exemption from tax for an angel investor in india

  • Startup Recognition Certificate: The Department for Promotion of Industry and Internal Trade (DPIIT) should certify the startup in which the investment is made as an eligible startup. DPIIT must issue a recognition certificate to the startup.
  • Valuation Report: A registered valuer is required to prepare the startup's valuation report. The fair market value of the shares provided to the angel investor must be ascertained using the information in this report. The value needs to be completed using the guidelines provided.
  • Investment Agreement: A precise and enforceable investment agreement should be in place between the angel investor and the startup. The terms and circumstances of the investment, including the number of shares issued, the valuation, and any other pertinent information, should be outlined in this agreement.
  • Submission to Inter-Ministerial Board: The Inter-Ministerial Board of Certification must receive an application for tax exemption from both the startup and the investor. The value report, the startup recognition certificate, and any other pertinent documents should be included with the application.
  • Self-Declaration: To be eligible for the tax exemption, the investor may have to submit a self-declaration certifying that they meet the requirements.
  • Income Tax filings: The angel investor's income tax filings might need to contain information about the investment. This is to guarantee openness and adherence to tax laws.
  • Adherence to clause 56(2)(viib) : Angel investment taxation is covered under this clause of the Income Tax Act. To be eligible for the exemption, the startup and the investor must make sure that the requirements listed in this section are met.

Procedure to apply for angel tax exemption in india

  • DPIIT Identification : Verify that the Department for Promotion of Industry and Internal Trade (DPIIT) has approved the startup as an eligible startup. DPIIT must issue a recognition certificate to the startup.
  • Valuation Report: Have a registered valuer provide a valuation report for the startup. The fair market value of the shares provided to the angel investor should be ascertained by the valuation report.
  • Get the Required Documents Ready: Assemble the required paperwork, such as the investment agreement, valuation report, self-declaration, and startup recognition certificate, among other supporting materials.
  • Make Your Profile on the DIPP Startup Portal: Make your profile on the Startup India portal for the DIPP (Department of Industrial Policy and Promotion).
  • Fill out the DIPP Startup Portal Application: Open the Startup India portal and fill out the tax exemption application. Enter all necessary information and attach the appropriate files.
  • Application Processing: The Inter-Ministerial Board of Certification will handle the application. The board will check the eligibility requirements and go over the documentation.
  • Inter-Ministerial Board Communication: The Inter-Ministerial Board may share its decision following the review. Both the startup and the angel investor may receive tax exemptions if the application is accepted.
  • Income Tax Returns: Make sure that the startup and the angel investor accurately represent the investment and the tax exemption in their income tax filings.
  • Monitoring and Adherence: Keep yourself updated on any new mandates or legal needs. To continue to be eligible, you must abide by the requirements outlined in the exemption.

How can seedling help you with angel tax exemption in india

Seedling has the best team of experienced and knowledgeable professionals that can help you in the cases relating to angel tax exemption in India. Seedling has the reputation of providing the best legal advice which one can get relating to any matter in the domain. The team here deals with angel tax exemption very diligently.

Most common question about our services

What is the applicable angel tax rate in India?

Investments over and above the fair market value are taxed at 30.9% Are angel investors eligible for tax exemption ? As per the income tax notification angel investors are eligible for a 100%tax exemption for investing in startups with higher fair market value.

Why is CBCD exempting investors from angel tax ?

The goal of the action is to lessen the tax burden and promote investments in start-ups. In addition, the CBDT has expanded resident investors' options beyond the Discounted Cash Flow (DCF) and Net Asset Value (NAV) techniques by introducing five new methods of valuation.

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