Startup tax — LTCG · DTAA · PFIC
Whichever route you pick — angel platform, AIF (Alternative Investment Fund), direct equity, or listed — tax + compliance applies. What you owe India, how to offset under DTAA (Double Taxation Avoidance Agreement), US PFIC (Passive Foreign Investment Company) overlap.
Every startup exit — angel platform, AIF distribution, or direct equity sale — creates a taxable event in India. The gain is subject to Indian capital gains tax, reported in your ITR, and TDS is deducted at source by the buyer or fund. If your country of residence also taxes the same gain, DTAA lets you offset the Indian tax paid against that foreign liability — so you're not taxed twice on the same rupee.
For US tax residents the overlap gets more complex: Indian startup holdings may trigger PFIC (Passive Foreign Investment Company) classification under US tax law, requiring annual Form 8621 filing even if you haven't exited yet. This page maps the India-side rules, DTAA relief, the US-specific overlay, and the mechanics of getting exit proceeds out of India via NRO repatriation.
Unlisted Indian equity (your startup investments) qualifies for LTCG if held more than 24 months. Rate is 12.5% flat on gains above ₹1.25 lakh exemption (post-2024 budget). No indexation benefit for NRIs.
- Example: Invest ₹10L, exit at ₹50L after 36 months → ₹40L gain → ₹39L taxable (after ₹1.25L exemption) → ₹4.88L tax
- TDS: Buyer/AIF deducts TDS at 12.5% on payout
- NRO route: Net gain credited to NRO account; subject to $1M/yr (~₹8.3 cr) repatriation cap with Form 15CA/CB
Sold within 24 months of buying? You pay STCG at 20% (post-2024 budget hike from 15%). No exemption threshold. Rare for startup investments — most exits take 5+ years — but applies if you sell early on a secondary or buyback.
- Example: Bridge round → secondary exit at 18 months → 20% on full gain
- Workaround: Time exits past 24-month mark for the 12.5% LTCG rate
India has DTAAs with 90+ countries. The Indian tax you pay on capital gains is creditable against the equivalent foreign tax — you won't pay twice on the same gain.
- US: Form 1116 (Foreign Tax Credit) — claim ₹4.88L Indian tax against US capital gains tax
- UK: Foreign tax relief on Self Assessment
- Canada: Foreign tax credit on T1
- Australia: Foreign Income Tax Offset on annual return
If you're a US tax resident (citizen, green card, substantial presence), your Indian startup holdings may be classified as a PFIC (Passive Foreign Investment Company) if the company has >75% passive income or >50% passive assets. Most operating startups are NOT PFICs, but check.
- If PFIC: Annual Form 8621 required; election options (QEF, mark-to-market, default)
- FBAR: Indian investments > $10K aggregate at any point during the year → FinCEN Form 114
- FATCA Form 8938: If specified foreign financial assets > $50K (single) / $100K (joint, abroad)
SEBI AIFs Cat I (VC funds) and Cat II (PE/credit funds) have pass-through tax status — gains aren't taxed at the fund level. They flow through to LPs and you pay at YOUR tax rate.
- For NRIs: 12.5% LTCG on portfolio company exits (post-24-month hold)
- Distributions: Quarterly K-1-equivalent statements show your share of gains
- Cat III (hedge funds): NOT pass-through — fund-level tax applies, then distribution is post-tax
Net proceeds (post-TDS) land in your NRO account. To wire them out:
- Form 15CA Part C: Self-declaration with payment details
- Form 15CB: Chartered Accountant certificate confirming taxes paid
- Form A2: RBI form for purpose of remittance
- Annual cap: $1M/year per NRI on NRO repatriation (separate from LRS)
Time exits past 24 months. Use DTAA credits. Get a US-India CPA before your first exit.
The single highest-leverage tax move is timing: 24-month hold flips the rate from 20% → 12.5%. The second is documentation: keep TDS certificates and AIF distribution statements organized so DTAA credit claims are straightforward. The third is professional help: a US-India CPA charges ~$1,500/year and saves you 5x that the first time you have a meaningful exit.
Three patterns we see
Keep share certificates, term sheets, and bank wires organized
Date discrepancies between term sheet, wire, and certificate can shift your LTCG/STCG status by months. NRIs who keep clean records claim DTAA credits in 1-2 weeks; those who don't take 6+ months and often miss claims.
Push past the 24-month mark before signing the SHA
If you're 23 months in and a buyback offer comes through, pause. The 7.5% rate difference (12.5% vs 20%) on a ₹50L gain = ₹3.75L. Worth a one-month delay in 95% of cases.
India return + foreign return + DTAA reconciliation
File your Indian ITR-2 with the capital gains schedule first (deadline 31 July). Then file your foreign return (US 1040 / UK SA / etc.) claiming DTAA credit. Keep the Indian Form 16A for 7 years.
Common questions
Detailed answers on our Q&A page.