Income from Venture Capital and Private Equity Funds investing in Start-Ups is ‘Capital Gain’: CBDT [Read Letter]

Budget Start - ups

Income from Sale of Unlisted Shares to be treated as ‘Capital Gains’ instead of ‘Business Income’.

In a significant letter addressed to Chief Commissioners and Director Generals of Income Tax by the Central Board of Direct Taxes (CBDT) said that, Income from Sale of Unlisted Shares to be treated as ‘Capital Gains’.

The CBDT has relaxes Tax norms to deal with certain Venture Capital (VC) and Private Equity (PE) funds investing in start-ups. This move will help to boost start-ups in the Country.

The letter stated that, “It was communicated that income from such a transfer would be taxable as ‘Capital Gains’ irrespective of the period of holding of the unlisted shares. However, certain situations were provided in para 3 of the said order where the Assessing Officers were required to take appropriate view in the matter”.

The letter also stated that, “The matter has been considered by the Board. Primarily, SEBI registered Category I & II AIFs invest in unlisted shares of ventures, many of which are new set-ups or start-ups, and thus, some form of ‘control and management of the underlying business’ may be required to be exercised by such AIFs to safeguard the interest of the investors”.

“It was also clarified that exception in clause (iii) of para 3 of order dated 02.05.2016 in file of even number, would not be applicable in cases of SEBI registered Category I & II AlFs only”. It added.

Earlier, income arising to a PE or VC from stake-sales in start-ups and involving the transfer of control or management change was to be treated as “business income”.

Read the full text of the letter below.