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vc investments

Capital gains tax relief likely for investors under new government

vc investments

With a view to give a further boost to the startup ecosystem in the country, DPIIT is considering exempting investors from capital gains tax when they exit a startup.

Once the new government takes over by the end of next month, the Department for Promotion of Industry and Internal Trade (DPIIT) is expected to moot the idea then.

This comes after the government decided to extend relief from angel tax to investors and entrepreneurs following hard lobbying by these groups. It now wants to examine the entire gamut of regulatory issues related to startups for a robust ecosystem.

As per a report appearing in ET, DPIIT is considering two alternatives to deliver this incentive — one, a blanket exemption, and two, a conditional exemption based on funds redeployed.

Earlier, a new section 54 EE has been inserted in the Income Tax Act for the eligible startups to exempt their tax on a long-term capital gain when same funds or a part thereof is invested in a fund notified by Central Government within a period of six months from the date of transfer of the asset.

The maximum limit, in this case, is Rs 50 lakh. Such amount shall be remain invested in the specified fund for a period of 3 years.

In another incentive, under Section 54 GB of the Income Tax Act, they get exemption from tax on capital gains arising from the sale of a residential house or plot if the amount of net consideration is invested in equity shares of an eligible startup.

The next set of planned incentives on capital gains shall cover all investments in startups.

While government official quoted in the report expressed that it would be difficult to exempt investors on the basis of income, DPIIT will suggest exemption from capital gains if investors would back local startups from exit money.

The proposed measure is tune with the framework in Singapore, HongKong and the UK where such angel investments get tax breaks if they reinvest them into startups. Startup investment, without doubt, has a higher risk profile than other assets, but the tax reliefs can help mitigate them to an extent.

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