To facilitate the smooth flow of funds into startups, the Department for Promotion of Industry and Internal Trade (DPIIT) is working on a proposal to clearly define Accredited Investors.
Funds inflow in startups by these Investors may be exempted from angel tax subject to complying with certain net worth criteria.
DPIIT proposal on the above lines would be submitted to the finance ministry for approval in the coming months.
Under the proposal, accredited or genuine investors can invest any amount under certain parameters which would neither be too liberal nor extra-stringent, an official was quoted as saying in a Businessline report via PTI.
There would be a linkage between investments and investors’ net worth. For example, if an investor plans to put in Rs 1 crore in a startup, his/her net worth should be 10X of that amount (Rs 10 Cr).
These accredited investors, which can include trusts, individuals, family members of a startup and unlisted companies, may get an exemption from angel tax under Section 56(2)(viib) of Income Tax Act, 1961, beyond the Rs 25 crore limit.
Presently startups are allowed full angel tax concession on investments up to Rs 25 crore. Section 56(2) of the I-T Act provides that the amount raised by a startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30%.
To widen the ambit of exemption under the Angel Tax, the department is also suggesting to bring funds of alternative investment funds (AIFs) category 1 and 2 in startups to be completely exempted from this section.
Currently, only certain areas of AIF category 1 are exempted.
For further developing the startup ecosystem in the country, DPIIT has also prepared ‘Startup India Vision 2024’ document that aims for an ambitious target of helping 50,000 new startups in the country and creating 2 million direct and indirect employment opportunities.
India has the second largest startup ecosystem in the world and is expected to show a yearly growth of 10-12%. On an average, about 300-400 startups get angel funding in a year in the unit range of between Rs 15 lakh to Rs 4 crore. So far, as many as 17,984 startups have been recognised by the department.