Tax Exemption on Capital Gains – Prime Minister Narendra Modi unveiled government’s Start-up India policy at an event held in Vigyan Bhawan, New Delhi on January 16, 2016. The Action Plan aims to encourage seed-capital investment in Startups, for young, aspiring Indians to build on their business ideas.
Under The Income Tax Act, 1961, where a Startup (company) receives any consideration for issue of shares which exceeds the Fair Market Value (FMV) of such shares, such excess consideration is taxable in the hands of recipient as Income from Other Sources.
In the context of Startups, where the idea is at a conceptualization or development stage, it is often difficult to determine the FMV of such shares. In majority of the cases, FMV is also significantly lower than the value at which the capital investment is made. This results into the tax being levied under section 56(2) (vii b).
Currently, investment by venture capital funds in Startups is exempted from operations of this provision. The same shall be extended to investment made by incubators in the Startups.
Source:-Startup India: Action Plan
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