The relief for startups facing tax demands for selling shares at a premium to their fair market value will be effective from 19 February, the Central Board of Direct Taxes (CBDT) said in a notification issued on Tuesday.

The government had on 19 February announced exemption for startups from taxation of share premium in excess of fair market value subject to riders. That announcement made by the commerce ministry has now been given effect under the Income Tax law.

Section 56 (2) (viib) of the Income Tax Act — which came to be known as the angel tax provision — will not apply to funds received beyond the face value of shares from a resident if it fulfills the riders specified in the commerce ministry’s 19 February notification and files a declaration, CBDT said in the notification. “This notification shall be deemed to have come into force retrospectively from the 19th February, 2019."

The commerce ministry last month announced that investments in startups up to ?25 crore will be exempted from the angel tax provision, up from the current ?10 crore. It had also said startups with sales of up to ?100 crore will be eligible for tax relief. Earlier, the threshold was ?25 crore. According to the new norms, an entity is considered a startup eligible for relief for up to 10 years from the date of incorporation, up from the earlier seven years.

The relief is expected to encourage wealthy individuals to invest in startups that receive capital at a premium due to their innovative business models although the valuation is not justified by the physical assets they hold.

Rakesh Nangia, managing partner, Nangia Advisors(Andersen Global) said the CBDT was required to put in place the mechanics for claiming benefit given to startups under last month’s notification issued by the Department for Promotion of Industry and Internal Trade.