Most Startups receive funding by way of equity investments not based upon current valuations but based upon the future of the startup foreseen by the investor, based upon his investment acumen.

Section 56 (2)(viib) of the Income Tax Act, imposes taxes of 30.9% under ‘Income from other sources’ on a Company for receiving money exceeding its Fair Market Value (FMV) from any Indian Tax resident except from a Venture Capital fund or a Venture Capital undertaking defined in the Act.

This draconian provision, taxed Investments in startups from ‘Angel Investors’ and other ‘Domestic Investors’. This forced the domestic investors to stay away from investing in startups.

However, as reported in economictimes, the Government has issued a notification  or contemplating to do so, to exempt Domestic and Angel Investors from applicability of section 56 (2). This was much anticipated and is a very welcome move and will boost domestic investments and Indian startups and will be a shot in the arm for the Indian startup ecosystem.

Official notification from the Income Tax Department is still awaited to see if its really ” Goodbye Angel Tax – Section 56 (2)(viib) “.  We will come back with more on this, once we analyze the actual notification and its impact on the existing laws, to give a more specific input. Also, we are also yet to see, if this exemption is available only to the startups registered in the Governments startup India policy or to all the startups.