Tax exemption on investments above fair market rate for startups

Issuing shares above market value is taxable as per Section 56(2) (viib) of the Income Tax Act, 1961 however the Central Government may exempt certain classes from tax under Section 56(2) (viib) by notification. The Central Board of Direst Taxes (“CBDT”) has vide a notification dated 14th June, 2016 notified the much-awaited tax exemption on investments above fair market rate for startups which will enable startups to obtain investments from unregistered venture capital funds or high net worth individuals, without having to pay tax (referred to as angel tax) on the differential, if the investments made exceed the fair market value of the entity.

Startups as defined by the Department of Industrial Policy and Promotion vide its notification dated 17th February, 2016 means “an entity incorporated or registered in India not prior to 5 years, with annual turnover not exceeding INR 25 crores in any previous financial year.” The activities necessary to qualify as a startup must include – that the entity be working towards development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.

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