Investors investing in startups in India will no longer be required to pay an angel tax to the government. Under a recent move made by the government of India to boost the country's entrepreneurship sector and job creation market, it has decided to let go of the so-called 'angel tax' for investors.

Fundings to startups, notified under the PM  Modi announced government-approved plan in January this year, will not have to give tax even if it ends up exceeding the face value.

The existing rules state that any money raised by an unlisted company in India by the means of equity issuance has to be covered under this tax up to the extent that the amount is in excess of the fair market value. This extra money is taxable as "income from other sources" under the Section 56(2) of the Income-Tax Act India and charged the corporate tax rate, adding up to an effective tax of over 30 percent.

The venture capital community has been contesting for the removal of the angel tax for a long time now. According to them, the tax acts as a bug hurdle to their investment activities.

In majority of the cases, the valuation of the startups are way more than the market value as it is calculated on the potential of the idea rather than the startup's immediate worth. In such cases, the startups end up losing out a majority of the money inflow in angel taxes. But, now under the new notification issued by the Central Board of Direct Taxes, the startups would be now exempted from raising fundings from the rigours of Section 56(2)(viib).

Talking about the government's action to do away with the angel tax to a national business newspaper, Amit Maheshwari, partner, Ashok Maheshwary & Associates LLP said, "This has been long awaited and is a very welcome step. The abolition of this so-called 'angel tax' has been a long-standing demand of the industry." However, he wasn't happy with the fact that the Indian tax officers could still question the earlier investments as being overvalued in the view of declining valuations on a global level and in the Indian sub-continent.

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