Section 56(2)(viib) – Angel Tax Exemption – Exemption for DPIIT-registered startups.

Section 56(2)(viib) of the Indian Income Tax Act, commonly known as the “Angel Tax Exemption,” is a provision that has been introduced to promote entrepreneurship and incentivize investments in startups in India. This provision provides an exemption to eligible startups from the applicability of the so-called ‘angel tax’, which previously posed a significant challenge for early-stage enterprises seeking to attract funding from angel investors.

In order to qualify for the exemption under Section 56(2)(viib), startups must meet certain criteria set forth by the Department for Promotion of Industry and Internal Trade (DPIIT), formerly known as the Department of Industrial Policy and Promotion (DIPP). One of the key requirements is that the startup must be DPIIT-registered, which means it needs to be recognized by the government as an eligible entity under the Startup India initiative.

The startup must also fulfill the definition of a startup as per the DPIIT guidelines, which include being incorporated as a private limited company or a limited liability partnership, having been in existence for less than ten years from the date of its incorporation, and having an annual turnover not exceeding Rs 100 crore in any previous financial year.

Additionally, the startup should be working towards innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property. It should also aim to create or add value by developing a scalable business model with high potential for employment generation or wealth creation.

By meeting these criteria and being DPIIT-registered, startups can enjoy the benefits of the angel tax exemption, which essentially exempts them from any tax liability on the amount of consideration received for the issue of shares that exceeds the fair market value of such shares. This provision aims to encourage investments in startups by providing tax relief to angel investors and reducing the compliance burden on emerging enterprises.

Furthermore, the angel tax exemption is part of a broader set of policies and initiatives introduced by the Indian government to support and nurture the startup ecosystem in the country. These initiatives include the Startup India Action Plan, which aims to boost innovation, create employment opportunities, and foster a culture of entrepreneurship by providing various incentives, exemptions, and support mechanisms to startups.

Overall, the angel tax exemption under Section 56(2)(viib) is a welcome development for startups in India, as it not only provides much-needed relief from tax-related challenges but also signals the government’s commitment to fostering a conducive environment for innovation and entrepreneurship. By aligning with the DPIIT guidelines and fulfilling the necessary criteria, startups can leverage this exemption to attract investment, grow their businesses, and contribute to the vibrant startup landscape in the country.