Definition Of Startup

The Honorable Union Minister, Suresh Prabhu, recently amended the Definition Of Startup to simplify its exemptions under Section 56(2) (viib) of the Income Tax Act and provide relief from angel tax. The move is expected to relax the norms and facilitate the growth of startups in the country. This article seeks to create awareness of these newly announced provisions.

Ten Years Young

The Minister stated that an entity should be considered a started up to ten years from its date of incorporation/registration in place of the current seven-year period.

Turnover Limit

Entities which hasn’t crossed the turnover of INR 100 crores for any of the financial years during the specified ten-year period are categorized as startups, thereby enhancing the existing limit of INR 25 crores. The previous exemption limit was INR 10 crores.

Benefits of the Dictum

The move is expected to:

Unshackle angel investing and bring in domestic funds for startups.
Enable the creation of startups may potentially go global, thanks to the hike in the turnover limit.
Abate the instances of various redundancies; stretched timelines and red-tapism earlier associated with the exemption filing procedure and ensure a favorable environment for upcoming entrepreneurs.
Remove the need of justifying the valuation of angel investments, as investments from listed companies and other eligible investors are excluded from the computation of the INR 25 crore threshold, This would in-turn remove tax uncertainties.
Boost the startup ecosystem, which may eventually benefit the end consumers.

Explaining Angel Tax Mechanism

Angel tax refers to the income tax payable on the capital raised by unlisted companies through the issue of shares where the share price exceeds the fair market value of the shares sold. The excess realization is considered as income and would be taxable under

“Income from other sources.” Funds from angels qualify for a 30% tax liability. Startups with an aggregate paid-up capital (which includes share premium) of up to Rs. 25 crores will now be exempted from the provisions of angel tax. Apart from this, investments by non-residents, venture capital funds and the specified listed companies would not be counted for Rs.25 crore capital threshold limit. This effectively conveys that startups may now raise capital from such investors without any cap by dispelling worries of angel tax.

Eligibility for Exemption

Startups would only be considered for these exemptions if it is a privately held company recognized by the Department for Promotion of Industry and Internal Trade. Moreover, it should not be investing in any of the below-mentioned assets:

Building and land apartment, except the ones used by the startups for renting or held by it as stock-in-trade in the ordinary course of business.
Land and/or building which is not a residential house.
Loans and advances, except the ones extended in the ordinary course of business by startups where the lending of money is a substantial part of its business.
Capital contributions made to another entity.
Shares and securities.
Motor vehicles, aircraft, yacht or any mode of transport which costs above Rs. 10 lakhs. However, these utilities would be exempted if the startups hold it for plying, hiring, leasing or as stock-in-trade in the ordinary course of business.
Jewellery, except if held by the startups as stock-in-trade in the ordinary course of business.
Other assets specified for this purpose.

Back to Learn

Frequently Asked Questions

Common questions about Startup Definition and Angel Tax Exemption Policies.

The new definition considers an entity as a startup for up to ten years from its date of incorporation/registration, instead of the previous seven-year period. Additionally, entities with a turnover not exceeding INR 100 crores in any financial year during this ten-year period are categorized as startups, compared to the earlier limit of INR 25 crores.

The amended definition is expected to facilitate angel investing, enable the creation of startups with global potential, reduce red-tapism and uncertainties related to exemption filing procedures, and ultimately boost the startup ecosystem in the country. It also removes the need for startups to justify the valuation of angel investments, providing relief from angel tax.

The exemption under Section 56(2)(viib) of the Income Tax Act aims to provide relief from angel tax for startups. It exempts startups from paying income tax on the capital raised through the issue of shares where the share price exceeds the fair market value of the shares sold.

To be eligible for the exemption, a startup must be a privately held company recognized by the Department for Promotion of Industry and Internal Trade. Additionally, it should not invest in certain specified assets, such as land, buildings (except for business purposes), loans and advances (except in the ordinary course of business), and capital contributions to other entities, among others.

The amendment removes the need for startups to justify the valuation of angel investments, as investments from listed companies and other eligible investors are excluded from the computation of the INR 25 crore threshold. This effectively allows startups to raise capital from such investors without worrying about angel tax.

The increase in the turnover limit from INR 25 crores to INR 100 crores allows more companies to be categorized as startups and benefit from the exemptions and incentives provided to them. This move is expected to enable the creation of startups that may potentially go global.

Startups are not allowed to invest in assets such as land and buildings (except for business purposes), loans and advances (except in the ordinary course of business), capital contributions to other entities, shares and securities, motor vehicles, aircraft, yachts, or any mode of transport costing above Rs. 10 lakhs (except for business purposes), and jewellery (except for stock-in-trade).

The amendment aims to create a favorable environment for entrepreneurs by facilitating angel investing, reducing red-tapism and uncertainties related to exemption filing procedures, and providing relief from angel tax. These measures are expected to boost the startup ecosystem and encourage more individuals to pursue entrepreneurial ventures.

The extension of the period from seven years to ten years for an entity to be considered a startup allows more companies to benefit from the incentives and exemptions provided to startups for a longer duration. This extended timeline recognizes the challenges faced by startups in their initial years and provides them with a longer window to establish themselves.

By unshackling angel investing and providing relief from angel tax, the amendment is expected to encourage more domestic investors to invest in startups. This increased inflow of domestic funds can provide startups with the necessary capital for growth and expansion, thereby strengthening the overall startup ecosystem in the country.