The government is considering exempting investors from tax on capital gains accrued when they exit a startup, in a bid to attract more funds into the sector.
The Department for Promotion of Industry and Internal Trade (DPIIT) is weighing two alternatives to deliver this incentive — one, a blanket exemption, and two, a conditional exemption based on funds redeployed.
After giving investors and entrepreneurs relief from the so-called angel tax, the government now wants to encourage startups and is examining regulatory issues, including taxation, which need to be eased.
At present, startups get two sets of exemptions related to capital gains tax. Under Section 54 GB of the Income Tax Act, they get exemption from tax on capital gains arising from 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 transfer of long term capital assets — not exceeding Rs. 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.