Section 10(23FB) of the Income Tax Act provides a tax exemption for income earned by a Venture Capital Company (VCC) or Venture Capital Fund (VCF) from investments in a Venture Capital Undertaking (VCU).
Who Qualifies:
- VCC: A company registered under SEBI’s Venture Capital Fund Regulations or as a sub-category of Category I AIF under SEBI’s AIF Regulations.
- VCF: A trust or fund registered similarly under SEBI regulations.
What’s Exempt:
- All income (like dividends, interest, capital gains) earned from investments in a Venture Capital Undertaking, which is typically an unlisted domestic company engaged in specified sectors such as biotechnology, IT, nanotechnology, etc.
Conditions:
- The VCC/VCF must be registered with SEBI.
- At least two-thirds of investible funds must be in unlisted equity or equity-linked instruments of VCUs.
- No investment should be made in an associate company.
- Units or shares of the fund/company must not be listed on a recognized stock exchange.
Example:
Suppose Alpha Ventures LLP, a SEBI-registered Category I AIF (Venture Capital Fund), invests ₹50 crore in an unlisted fintech startup. During the year, it earns ₹5 crore in dividends and ₹10 crore in long-term capital gains.
Since the fund:
- Is registered with SEBI,
- Invests in a qualifying VCU,
- Meets the prescribed conditions,
the entire ₹15 crore is exempt from income tax under Section 10(23FB). However, the investors in the fund are taxed on their share of income under Section 115U, following a pass-through model.
