Boost for Startup Ecosphere from SEBI: Tax Relief for Angel Investors

The startup people cannot ask for better than this. If you have already started up your new venture or want to start up in the near future, this news is going to get you on cloud nine.

Two important events happened in the recent past which has boosted the startup sentiments in India. One, the successful acquisition of Redbus.in by Napser Group of South Africa to the tune of $138 Million and second, SEBI will provide tax relief to the Angel Investors who have invested in startups.

SEBI’s formal recognition – on 25^th June – to a separate class of investors, Angel Investor Funds, resolves the issue of “angel tax”. However, for an angel investor who invests at a premium in a startup, this tax issue continues to exist.

The Finance Act 2012 had introduced what is commonly referred to as angel tax among private equity investors. If an unlisted company received consideration from any person in India against the issue of shares in excess of fair market value, such excess amount was taxable in the hands of the investee company as “income from other sources”. Certain exceptions were carved out and investments, even if above fair market value by venture capital funds or venture companies, were not covered by angel tax.

The exception given to the VC funds or VC companies stemmed from the fact that these entities were regulated by SEBI and investments made above fair market value would not be surreptitious. Smaller funds could not register as VC funds or VC companies owing to the large corpus requirements, mandated by SEBI.

With Angel Investor Funds now recognized as a separate sub-category with smaller corpus requirements, and their being included in the definition of venture capital funds under SEBI (Alternative Investment Funds) Regulations 2012, this problem of angel tax for the investee company is mitigated. Investments made by SEBI registered angel funds in approved investee companies, even if the above fair market value, will not entail an angel tax in the hands of the investee company.

However, if an unlisted startup receives investments from an individual angel investor, the issue of angel tax will remain.

Investments made by individual angels do has a crucial role to play in the entrepreneurial ecosphere, as the minimum level of investment that can be made by a registered angel fund is much higher at Rs. 50 lakhs.

This move of SEBI is definitely an encouraging move for startups in India, as a majority of the startups face funding issues, and due to regulatory issues angel investors choose companies very strictly.

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