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Investors Exiting Startups Likely to Get Capital Gains Tax Relief

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With a view to attracting more funds into the sector, the government might exempt investors from tax on capital gains accrued when they exit a startup. The Department for Promotion of Industry and Internal Trade (DPIIT) is assessing two alternatives to deliver this incentive — (1) A blanket exemption (2) A conditional exemption based on funds redeployed. The latter would be on lines of the benefits offered to nascent firms in the UK.

“We want to recommend that they should be exempt from capital gains while exiting,” an official said. He also added that DPIIT is yet to make this recommendation to the revenue department. DPIIT will moot the idea when the new government takes over.

After giving investors and entrepreneurs relief from the so-called angel tax, the government now wants to give a boost to the startups and is, therefore, examining regulatory issues, including taxation.

Currently, the startups are entitled to two sets of exemptions related to capital gains tax. Under Section 54 GB of the Income Tax Act, they get an exemption from tax on capital gains arising from the sale of a residential house or plot if the amount of net consideration is invested in equity shares of an eligible startup for purchase of a specified asset.

Further, Section 54 EE of the Finance Act, 2016, provides for exemption of tax on capital gains arising out of the transfer of long term capital assets — not exceeding `50 lakh in a financial year — invested in a fund notified by the central government.

These benefits provide relief to those who liquidate personal assets to fund their startups while the next set of incentives under consideration seeks to encourage all investments in startups

“It is difficult to exempt investors on the basis of income, but we can make them capital gains tax exempt on exit if they invest in our startups,” said the official. “We are also thinking whether this clause should be limited to Indian investors or (include) everyone, along with the conditions of the exemption, such as redeployment.”

Experts and startups have praised the idea. “In the UK, such angel investments get tax breaks if they replough them into startups. This helps minimize fraud and more capital gets deployed,” said an industry watcher.

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