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Demystifying Angel Tax Exemption for Startups: A Simplified Guide

Struggling to fund your Indian startup? Angel Tax got you down? There's a govt exemption you might be eligible for! Apply for DIPP recognition & unlock angel investment with tax benefits. Learn more & answer these questions to see if you qualify!

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Swati Dayal
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Building a startup in India? Funding can be a rollercoaster, especially at the initial stage. While India's startup scene is thriving, securing early-stage funding remains a major hurdle for young companies. Enter angel investors, the fairy godmothers of the startup world, who provide crucial financial support. But here's a plot twist: Angel Tax can throw a wrench into these funding plans.

What is Angel Tax?

It's a levy imposed by the government on investments exceeding a startup's fair market value. Imagine an angel investor believing in your brilliant idea and injecting funds. Great, right? Well, Angel Tax kicks in if the investor pays more than the government's estimated worth of your company's share. It's like getting taxed on a birthday gift exceeding someone's arbitrary guess! This complexity discourages angel investors, hindering your startup's growth.

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Here's the good news! The Department of Industrial Policy and Promotion (DIPP) offers an Angel Tax exemption for DIPP-recognized startups. This means you can raise funds freely from angel investors without the tax burden.

Who qualifies for this exemption?

  • Your startup needs to be DIPP-recognized. This government certification program validates your legitimacy.
  • The total paid-up capital (initial investment) and share premium (additional payment for shares) must be under Rs 10 crore.
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Investor Criteria

  • Resident Indian citizens with a strong financial background. This is demonstrated by either having an average income of Rs 25 lakh for the past three years or a net worth of Rs 2 crore.

Ready to apply for the exemption? Here's a step-by-step guide

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  1. Fill out the "Exemption under Section 56" form.
  2. Get a merchant banker's report. A SEBI-registered Category-I merchant banker will assess your shares' fair market value (think of it as a financial health check). This report costs around Rs 50,000.
  3. Submit the application and report to the DIPP.
  4. An inter-ministerial board will review your application and determine your eligibility.

The DIPP might even grant you an additional exemption under Section 80 IAC, allowing you to avoid income tax for three out of seven years after incorporating your startup.

Benefits of the Exemption

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This simplified process aims to make angel investment accessible, fostering innovation, growth, and a robust startup ecosystem in India.

Remember:

  • DIPP recognition is crucial.
  • Keep your paid-up capital and share premium under Rs 10 crore.
  • Find investors meeting the income/net worth criteria.
  • Submit the application with the merchant banker's report to the DIPP.
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With this knowledge, you can navigate the Angel Tax exemption process and secure the funding to propel your startup to success!

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