The income tax (I-T) department has informed about 120 startups that they are exempt from paying taxes on funds raised from angel investors.

The intimation, sent to startups in the last few days under a new scheme announced in February, brings to an end a major tax problem faced by new-age firms that have been wrongly caught in an anti-evasion provision in the Income Tax Act.

The communication from the tax department acknowledging the tax relief is especially helpful to startups that have already got tax notices for share premium that is higher than their fair value. They can now produce the intimation from the Central Board of Direct Taxes (CBDT) before the tax officers who issued the notices. Wherever assessments have been completed and final tax demands are issued, the startups can produce the exemption certificates at the stage of appeals to a higher authority within the tax department.

About 150 firms have applied for tax relief to startups announced in March, of whom 120 have so far received the tag of ‘startup’ eligible for tax relief, a person familiar with the development said on condition of anonymity. The remaining are likely to get the tag once certain flaws in their application are corrected, said the person. Under the new scheme, an entity is considered a startup eligible for tax relief for up to 10 years from the date of incorporation, up from the earlier seven years. The move is expected to encourage wealthy individuals to invest in startups, which receive capital at a premium on account of their innovative business model. As their physical assets do not justify high valuation, the anti-evasion provision in the Income Tax Act had led to many being questioned about the basis of such valuation.

Startups registered with the department for promotion of industry and internal trade will not be questioned about the share premium received in excess of fair market value, according to last month’s decision.

Section 56(2) (viib) of the Income Tax Act provides for taxation of such share premium.