Section 10(23F) of the Income Tax Act provided a tax exemption for dividends and long-term capital gains earned by a venture capital fund (VCF) or venture capital company (VCC) from investments in equity shares of a venture capital undertaking.
However, this exemption applied only to investments made before 31st March 1999 and is now largely obsolete. It was replaced by more modern provisions like Section 10(23FB) and Section 115U, which govern taxation of venture capital entities under SEBI regulations.
Key Conditions (when it was in force):
- The VCF or VCC had to be approved by the prescribed authority (Director of Income Tax – Exemptions).
- Investments had to be in unlisted equity shares of a venture capital undertaking.
- The exemption was valid for a maximum of three assessment years at a time.
Example:
Suppose Innovate Ventures Ltd., a VCC, invested ₹10 crore in equity shares of a startup engaged in infrastructure development (a notified venture capital undertaking). It earned ₹2 crore in long-term capital gains and ₹50 lakh in dividends in FY 1998–99. If it had valid approval under Section 10(23F), this ₹2.5 crore would have been exempt from tax.
For current tax treatment of venture capital funds, you’d want to look at Section 10(23FB) and pass-through taxation under Section 115U
