New requirements


In a bid to generate investment in start-ups and provide certainty on the so-called 'angel tax', the Ministry of Commerce and Industry has issued another notification easing the criteria to avail of the exemption under Section 56(2)(viib) of the Income Tax Act 1961.

Section 56(2)(viib) taxes closely held companies on the capital that they raise through the issue of shares in excess of the fair value to resident investors. The erstwhile notification (issued by the ministry on 11 April 2018) required companies, among other things, to obtain a valuation report from a merchant banker specifying the fair market value of issued shares. As a result, the tax authorities had requested that certain start-ups justify how they came to the premiums cited in their valuation reports.

To resolve this situation, on 16 January 2019 the ministry issued a notification which removed the requirement to provide a valuation report. Now, only a justification of share prices is required. In addition, the Central Board of Direct Taxes must now grant or decline tax exemption requests within 45 days of receipt of an application.

Despite the issue of this notification, uncertainty persisted. As such, on 19 February 2019 the ministry issued a new notification, which supersedes both earlier notifications.

The latest notification reduces the hassle faced by start-ups and further simplifies the criteria for availing of the exemption under Section 56(2)(viib).

New requirements

Entities will now be considered start-ups for 10 years instead of seven, provided that their turnover does not exceed Rs1 billion (as opposed to the old requirement of Rs250 million) in any financial year.

Further, in order to increase the number of start-ups that are eligible for the exemption, the threshold for the aggregate amount of paid-up share capital and share premiums following the issue of shares has been increased from Rs100 million to Rs250 million. Moreover, while computing the aggregate limit of Rs250 million, funds from non-residents, venture capital companies and venture capital funds will not be considered. The erstwhile limit of Rs100 million subsumed all investments. Now that funds from non-residents and venture capital funds are excluded, resident investors can now invest up to Rs250 million.

Further, the new notification removes the requirement that investors be accredited (ie, they must have a returned income of at least Rs250,000 and have a net worth above Rs2 million), which will further enable start-ups to easily receive funds from small individual investors.

The notification also excludes considerations received by listed companies (whose shares are frequently traded) which have:

  • a net worth above Rs1 billion in the last day of the financial year preceding the year in which the shares are issued; or
  • a turnover above Rs2.5 billion in the financial year preceding the year in which the shares are issued.

However, to avail of the exemption, investments cannot be made in any non-core business assets, such as land, buildings, shares and securities. Investment will be restricted for seven years from the end of the financial year in which the shares are issued at premium. While such restrictions can be seen as a move to channelise funds and reduce the time it takes to reach the break-even point, they may also hamper the growth of start-ups looking to establish subsidiaries.


This progressive notification will provide start-ups with a much-needed reprieve in terms of the increased threshold limits for paid-up share capital, allowing them to avail of the Section 56(2)(viib) exemption more easily. However, this notification may not remedy earlier issues faced by start-ups. A unique situation may arise wherein start-ups may fall under three different notifications, depending on the relevant period. Since start-ups may raise funds in tranches, this may lead to instances where different compliance obligations are required for the same investors. In order to avoid such a dichotomy, it is hoped that the ministry will provide further clarity with respect to the applicability of the notifications when addressing past issues.

For further information on this topic please contact Pranay Bhatia at BDO in India by telephone (+91 22 3332 1600) or email ([email protected]). The BDO in India website can be accessed at