Government to make changes in section 56(2) of income tax act in a bid to promote startups

The ‘angel tax’ for investors, who provides funding for startups, has been removed by the Government, to boost entrepreneurship and job creation in the country. Funding given to startups which are notified under the plan mentioned by PM Narendra Modi in January, will not face tax even if it exceeds the face value.

Unregistered venture capital funds such as Resident angel investors, domestic family offices or domestic funds can now relax and not worry about the invested amount getting taxed. Under existing rules, funds raised by an unlisted company through equity issuance are covered under this tax to the extent the amount is in excess of the fair market value. In case of extra inflow, it is charged the corporate tax rate, resulting in an effective tax of over 30%.

In many cases, the valuation of startups is far in excess of market value as it is based on the promise of the idea and not the immediate worth. In such a case, the startup would end up losing a chunk of the inflow to this ‘angel tax’. This has been long awaited and is a very welcome step. The abolition of this so-called ‘angel tax’ has been a long-standing demand of the industry,? said Amit Maheshwari, partner, Ashok Maheshwary &Associates LLP.  

It is a summarization of an article in Economic Times. For more information, visit

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