Granting tax relief to start-ups, the Central Board of Direct Taxes (CBDT) decided to exempt angel investors from income tax on their investments in start-ups with effect from April 11 this year. The exemption is linked to the conditions approved by an inter-ministerial board last month that defines such concession for share capital and share premium of the start-up not exceeding Rs 10 crore.

Also, the angel investor who plans to subscribe the shares in the start-up will have to fulfil prescribed criteria and the start up will have to procure a report from a merchant banker, specifying the fair market value of the shares in accordance with Income Tax rules. The CBDT has also amended Rule 11 UA (2)(b) of I-T Act, thereby making merchant banker valuation compulsory for the purpose of determining fair market value of unquoted equity shares, and omitted the word ‘accountant’.

The I-T department in notification dated May 24 superseded its June 2016 notification “…The Central Government, hereby notifies that the provisions of clause (viib) of sub-section (2) of section 56 of the said Act shall not apply to consideration received by a company for issue of shares that exceeds the face value of such shares, if the consideration has been received for issue of shares from an investor in accordance with the approval granted by the Inter-Ministerial Board of Certification,” the notification said. This notification will come into effect retrospectively from April 11,2018. The income tax exemption will be beneficial for angel investors who put money during early growth stage and would also provide level playing field for all investors. The commerce and industry ministry had on April 11 said that a start up can seek tax concession under the section 56 of I-T act. The section 56 provides for taxation of funds received by an entity.

According to the notification, an angel investor with a minimum net worth of Rs 2 crore or an average returned income of over Rs 25 lakh in the preceding three financial years would be eligible for 100 per cent tax exemption on investments made into start-ups above fair market value.

Several start-ups had raised concerns over taxation of angel funds under Section 56 of the Income Tax Act, which provides for taxation of funds received by an entity. As many as 18 start ups had received notices from tax authorities. This section provided that where a closely held company issues its shares at a price more than its fair market value, the amount received in excess of the fair market value will be charged to tax the company as income from other sources.