An entity will now be considered a startup up to 10 years from its date of incorporation/ registration instead of the existing period of seven years.

Chennai: Providing relief to entrepreneurs worried about the angel tax, the government on Tuesday relaxed the definition of startups and increased the tax exemption limit on investments received by them.

An entity will now be considered a startup up to 10 years from its date of incorporation/ registration instead of the existing period of seven years. "An entity shall be considered a startup if its turnover for any of the financial years since its incorporation/registration hasn’t exceeded Rs 100 crore instead of the existing Rs 25 crore," said Commerce Minister Suresh Prabhu.

Further, the consideration of shares received by eligible startups for shares issued, or proposed to be issued, by all investors shall be exempt up to an aggregate limit of Rs 25 crore, he said. Earlier, a startup was allowed to avail tax concession only if total investment, including funding from angel investors, did not exceed Rs 10 crore. The entrepreneur community was worried, as they had started receiving angel tax notices.

Investments by listed companies with a net worth of Rs 100 crore or turnover of Rs 250 crore into an eligible startup would also be exempted from the Section 56(2)(viib) of the Income Tax Act beyond the Rs 25 crore limit. Further, investments into eligible startups by non-residents, alternate investment funds (AIF)--category I --shall also be exempted under this section beyond the limit of Rs 25 crore.

However, the government has laid a few caveats also. The startup should be a private limited company recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) and should not be investing in a few specified asset classes. These asset classes include immovable property, transport vehicles worth more than Rs 10 lakh, loans and advances, capital contribution to other entities, shares and securities and jewellery other than that held by the startup as stock-in-trade in the ordinary course of business.

According to Padmaja Ruparel, Co-Founder, Indian Angel Network (IAN), the relaxed rules will unshackle angel investing and bring in domestic money for startups.

Industry body NASSCOM welcomed the decision to exclude start-ups from the ambit of angel tax. The exemption not only acknowledges India to be the world’s fastest growing start up ecosystem but will also encourage more investments flow for early-stage start-ups in India, it said.

"This eliminates a major obstacle for Indian start-ups and if implemented right, could give a significant boost to the Indian start-up ecosystem, as individuals with tax paid income as well as corporates will be able to easily participate in start-up investments," LocalCircles founder Sachin Taparia said.

However, Bhavin Shah, FS Tax Leader, PwC India, said that the industry had requested to include category-II AIFs as well in the exclusion list, “which has unfortunately not been considered favourably”.