Business loan, Start Ups and Angel Tax

India has one of the fastest-growing startup ecosystems in the world. And the recent government initiatives like Make in India, Startup India and schemes of small business loans are giving it a further boost.

Such business loan schemes and promotional campaigns are having a positive impact on angel investors in India and around the world who are increasingly investing in startups in India. An angel investor is a person who provides capital to startups in exchange for convertible debt or ownership for equity in the startup.

Until recently, startups in India had to face a big issue of Angel tax, which was introduced in 2012. Angel tax is the income tax levied on the capital raised by companies which are unlisted, through issuing of shares via off-market transactions.

The uniqueness about this tax is that it is levied if the angel investor is an Indian citizen. Along with that, the tax is applicable if the share price of issued shares is more than the company’s fair market value. The excess value is considered as income and deemed taxable.

Angel tax was introduced under the Finance Act, 2012 to combat money laundering through small companies. However, it was having a negative impact on the startup ecosystem.

To stop this negative impact on the startups in India, the government has given certain concessions like the entity will be deemed startup for 10 years up from 7 years. In addition to that, the upper-limit tax exemption for startups turnover is increased to Rs.100 crore up from Rs. 25 crore.

Exemptions on investments made by domestic investors on startups will only be given if it meets the below-listed criteria’s:

  • After the shares are issued, the paid-up capital complete with a share premium of the startup should not be more than Rs. 10 crore
  • The startups fair market value must be certified by a Merchant Banker
  • An investor net worth should be Rs. 2 crore
  • The average income of the investor in the last 3 financial years should be Rs. 50 Lakh or more

As of now, a startup has to simply put a request for angel tax exemption to the DIPP (Department of Industrial Policy & Promotion), with the required documents.

At present, the angel tax rate is 30.9% on the net investment which is more than fair market value of the business entity. So if a startup with a fair market value of Rs. 15 crore get an investment of Rs. 25 crore, by issuing 1 Lakh shares of Rs. 2,500 each, it will have to pay the Angel Tax amounting to a whopping Rs. 3.09 crore, on the excess Rs. 10 crore.

Government loan schemes for women entrepreneurs

With the Indian economy growing at a faster pace, a vast number of women have started entering the workforce. Not just that they are increasingly becoming job creator thanks to women’s entry into entrepreneurship.

Even the governments, whether central or state have started encouraging women to become entrepreneurs by providing them with small business loans. These business loan for new business, especially for women, will help them to enter the formal sector of the economy and become financially independent.

In order to facilitate and empower women in setting up their own business, central and state governments have launched various schemes of business loan in the last few years.

Here is a list of some schemes below:

Mudra Yojana

Mudra Yojana provides small business loans from Rs. 50,000 to Rs. 10 lakh to non-cooperate, non-farm small/micro-enterprises. Mudra loans can be given by commercial banks, regional rural banks and non-banking financial institutions.

Mudra loans have a special focus on female entrepreneurs who want to set up small businesses like a beauty parlor, tailoring shop, etc. Under Mudra loans, a women entrepreneur does not need to provide collaterals for security and the loan can be applied online.

Mahila Udyam Nidhi Scheme

If any female entrepreneur wants to avail a business loan for setting up her business, they can avail the Mahila Udyam Nidhi Scheme. It comes under the Small Industries Development Bank of India (SIDBI).

Under this scheme, a female entrepreneur can get loans of up to Rs. 10 lakh for a new or existing business. Interest rates may vary as per the government policies.

Stree Shakti Package

In order to avail this scheme, the women must have more than 50 % share in the business. A women entrepreneur can get up to Rs.20 Lakh under this scheme and if the loan amount taken for the small sectoral unit is below Rs.5 lakh than no security is taken.

TREAD scheme

Under Trade related Entrepreneurship Assistance and Development (TREAD) scheme which come under the Ministry of Micro, Small and Medium Enterprises, the government provides women entrepreneurs with finance and training.

Under this scheme, the government covers 30% of the total cost, while lending institutions will give the rest 70%. Apart from that, the government will also provide training to women entrepreneurs through an NGO and cost will be borne by the government.

Bhartiya Mahila Business Bank Loan

This scheme was launched through Bhartiya Mahila bank, especially for women entrepreneurs. The maximum loan amount that can be applied under this scheme is Rs.20 crore for manufacturing enterprises and loans up to Rs.1 crore will be collateral-free.

This business loan has the maximum repayment tenure of 7 years as of now.

Udyogini scheme

This scheme is applicable for those women who engaged in agriculture and other small business. Under this scheme, small business loans are provided to women who otherwise have to depend on money lenders.

A loan amount of up to is Rs. 1 lakh is provided under this scheme, but the amount can vary depending on the state governments. The scheme is applicable to the household of a female applicant whose annual income is less than Rs. 1 lakh.

Apart from the above list, there are various other government loan schemes for women entrepreneurs that can be taken through banks and financial institutions.