Genuine startup investments will be free from taxes, says government

New Delhi: The government on Wednesday assured that genuine investments in startups will not be taxed for exceeding fair market valuation.

The Income Tax Act treats share premium received from the sale of unlisted shares in excess of their fair value taxable as income from other sources.

The assurance comes after news reports said some startups have received notices from the income tax (I-T) department seeking details of their share transactions.

The move to seek clarifications on share premiums under section 56 of the Income Tax Act has been on for a few years.

The idea is to check instances like politicians accepting bribes in the guise of premium for shares in unlisted companies held by them.

However, the government has exempt startups registered under the commerce ministry from the purview of this provision.

The department of industrial policy and promotion (DIPP) said that it has taken notice of news reports. It said that there is a mechanism in place since April 2018 to grant exemption from the provisions of section 56(2) (vii b) of the Income Tax Act to genuine investors in recognised startups.

DIPP said in a statement issued on Wednesday, “DIPP has again taken up this matter of issue of the Income Tax notices with the revenue department so that there is no harassment of angel investors or startups.”

 it added, “Government is committed to protecting bona fide investments into startups.”


However, tax department officials said that only companies that act as vehicles for financial irregularities will be pursued. If the startup can explain how the valuation is justified, there is no tax liability on the premium, said an official, who spoke on condition of anonymity. This is an anti-evasion provision built into the law.