Angel Tax Exemption: A Step-by-Step Guide for Startups

For startups in India, one of the biggest challenges is to secure the necessary funding to grow and scale their businesses. This is where the concept of angel tax comes into play. Angel tax refers to the tax that is levied on the excess capital raised by a startup from its investors at a premium valuation. The purpose of this tax is to curb money laundering and prevent the misuse of funds. However, the Indian government has recognized the need to support and promote the growth of startups and has thus introduced the Angel Tax Exemption scheme. In this article, we will provide you with a step-by-step guide on how to apply for angel tax exemption for your startup.

Step 1: Understand the Eligibility Criteria
To avail the benefits of the Angel Tax Exemption scheme, your startup must meet certain criteria. Firstly, it must be recognized and registered as a “startup” by the Department for Promotion of Industry and Internal Trade (DPIIT). This recognition can be obtained by filling the necessary form on the DPIIT website and providing details such as the business idea, innovative nature of the business, and the job creation potential. Secondly, your startup must have a maximum turnover of Rs. 25 crores for the financial year in which the exemption is claimed. Additionally, it must have been incorporated after April 1, 2016, and should not have issued equity shares to existing investors at a price higher than the fair market value.

Step 2: Prepare the Required Documents
Once your startup satisfies the eligibility criteria, the next step is to gather and prepare the necessary documents for the application. These include:

1. Certificate of Incorporation: This is a document issued by the Registrar of Companies (ROC) after the company is registered.

2. Share Valuation Report: A chartered accountant must prepare this report to determine the fair market value of the company’s shares.

3. Certificate from Intermediary: If your startup has raised funds from a recognized Indian investor network or angel fund, a certificate from the intermediary is required.

4. Fund Utilization Certificate: This is a certificate from the company’s auditor, certifying that the funds raised have been utilized for the business and not for any personal gain.

Step 3: Submit the Application
Once you have all the necessary documents, you can apply for angel tax exemption through the online portal of the CBDT (Central Board of Direct Taxes). The application must include details of the startup, details of the investors, and the amount of funding raised. You must also provide a self-certification stating that your startup meets the eligibility criteria and complies with the conditions of the scheme.

Step 4: Await Approval
After submitting the application, you will receive a confirmation on the portal. The CBDT will then review your application and may ask for additional information or documents if required. Once all the necessary information is provided, the CBDT will issue a tax exemption certificate in your startup’s name within 45 days.

Step 5: Compliance Reporting
The angel tax exemption scheme requires a startup to report its compliance with the conditions of the scheme. This includes furnishing details of its financials and utilization of funds raised. The compliance report must be submitted within one month from the expiry of the financial year in which the funds were raised.

In conclusion, securing angel tax exemption for your startup is a straightforward process if you fulfill the eligibility criteria and provide all the necessary documents. The government’s effort to support the growth of startups through this scheme is commendable and has been well-received by the startup community. So, if you have a promising venture and need necessary funding, be sure to follow these steps and take advantage of the angel tax exemption scheme. Good luck!