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Angel Tax Exemption

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Expected To Be Complete* : 06 Aug 2024

Angel Tax Exemption: Understanding the Benefits and Limitations

Are you an entrepreneur looking to raise funds for your startup? If yes, then you might have come across the term " Angel Tax Exemption." In this article, we will discuss the meaning, benefits, limitations, and eligibility criteria of Angel Tax Exemption.

What is Angel Tax Exemption?

Angel Tax Exemption is a tax benefit offered to startups by the Indian government. This exemption is applicable to investments made by angel investors in eligible startups. Under this exemption, the investments made by angel investors in eligible startups are not subject to any tax.

Benefits of Angel Tax Exemption

Angel Tax Exemption comes with a plethora of benefits for startups, some of which are mentioned below:

Boosts Startup Funding

Startups often struggle to raise funds, and this exemption provides a significant boost to their funding efforts. Angel Tax Exemption allows startups to attract angel investors who are willing to invest in their ventures without worrying about the tax implications.

Promotes Innovation

The exemption encourages innovation by supporting new and innovative ideas. This, in turn, creates more job opportunities and contributes to the overall economic growth of the country.

Reduces Financial Burden

Startups are often strapped for cash, and the exemption helps reduce their financial burden. The exemption allows startups to retain a larger share of the investment amount, which can be used to further develop their products or services.

Limitations of Angel Tax Exemption

Although Angel Tax Exemption offers significant benefits, it also comes with certain limitations, some of which are mentioned below:

Limited Eligibility Criteria

The exemption is only applicable to startups that meet certain eligibility criteria. The eligibility criteria for Angel Tax Exemption are as follows:

1. The startup should be a private limited company or a limited liability partnership.

2. The startup's turnover should be less than Rs. 25 crores.

3. The startup should have a minimum of 100% of the investment amount subscribed to by angel investors.

Limited Investment Amount

Angel Tax Exemption is only applicable to investments up to Rs. 25 crores. Any investment amount exceeding this limit will not be eligible for the exemption.

Stringent Valuation Norms

Startups seeking Angel Tax Exemption are required to adhere to stringent valuation norms. The valuation of the startup should be based on the fair market value, and any deviation from this could lead to the rejection of the application.

Eligibility Criteria for Angel Tax Exemption

As mentioned earlier, startups must meet certain eligibility criteria to avail of Angel Tax Exemption. The eligibility criteria for the exemption are as follows:

1. The startup should be a private limited company or a limited liability partnership registered in India.

2. The startup should be less than ten years old from the date of incorporation.

3. The startup should have a turnover of less than Rs. 25 crores.

4. The startup should not have invested in any immovable property other than that used for its business purposes.

5. The startup should not be involved in any business other than that specified in its Memorandum of Association.

FAQs of Angel Tax Exemption

The Angel Tax Exemption is a tax benefit provided to angel investors who invest in startups. It was introduced to encourage more investments in the startup ecosystem in India.
The exemption is available to startups that are recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) and have a turnover of less than Rs 25 crore. Angel investors who invest in these startups are also eligible for the exemption.
Angel investors can claim an exemption on the amount of investment made in eligible startups up to a maximum of Rs 50 crore.
The exemption was introduced as a temporary measure in 2012 but has been extended several times. As of now, it is a permanent feature of the Indian tax system.
Yes, foreign investors who invest in eligible startups can also claim the exemption, provided they meet the necessary criteria.
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