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07-Mar2019

Income tax department notifies relaxed norms for startups

With an aim to encourage budding entrepreneurs, the income tax (I-T) department has notified the modified norms for startups to enable them to seek 'angel tax' exemption for investments of up to Rs 25 crore. The modified norms will be effective retrospectively from February 19, 2019, when the Department for Promotion of Industry and Internal Trade (DPIIT) relaxed the norms for startups.

The DPIIT, under the commerce and industry ministry, had raised the investment limit for 'angel tax' exemption to Rs 25 crore and extended the period of availing benefits to 10 years for startups. Earlier, the investment limit for a start-up to seek exemption under Section 56(2)(viib) of Income Tax Act, 1961, was Rs 10 crore and they were permitted to avail the benefits only for seven years.

The decision by the DPIIT came after several startups said they have received angel tax notices, impacting their businesses. Such notices, sent under Section 56(2)(viib) of the Income Tax Act, demanded taxes on angel funds received by startups. With regard to cases where tax demands have been raised, the CBDT has already asked the field formations to expeditiously clear them.

Section 56(2)(viib) of the Income Tax Act provides that the amount raised by a start-up in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent. Touted as an anti-abuse measure, this section was introduced in 2012. It is dubbed as angel tax due to its impact on investments made by angel investors in start-up ventures.


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