The DPIT, earlier known as DIPP (Department for Promotion of Industry and Internal Trade) is working on framing a definition of ‘accredited investors’ to provide tax incentives for investment in startups. The DPITT has already prepared a draft definition and is now looking forward to getting the opinion of stakeholders.
These accredited investors including trusts, individuals or family members of a startup and unlisted companies can get an exemption from angel tax under Section 56(2)(vii b) of the Income Tax Act, 1961 beyond the ₹25 crore limit.
An accredited investor has some special privileges under financial regulation laws. However, the definitions and classification criteria vary between countries. In common practices, accredited investors are HNIs, banks, financial institution who undergo high-risk investments as well as hedge funds, venture capital firms and angel investors undergoing complex investments.
As per current laws, Indian startups enjoy full angel tax exemption on investments up to ₹25 crores. Also, investors with a specified limit of turnover and net worth, listed companies, non-residents and alternative investment funds also get an exemption from angel tax on investments beyond the ₹25 crore limit.
The much-debated Angel Tax was introduced back in 2012 as an anti-abuse policy under section Section 56(2)(vii b) of the Income Tax Act. The policy stated that the amount raised by any startup in excess of its fair market value would be deemed as income from other sources and would be taxed at 30 per cent.