Section 10(23FB): Income Tax Exemption for Venture Capital Funds and Companies
Section 10(23FB) of the Income-tax Act, 1961 provided an exemption for specified income of eligible venture capital companies and venture capital funds from investments in venture capital undertakings. Eligibility depends on the statutory definitions, registration and investment conditions for the relevant year.
Eligible assessee: A qualifying venture capital company or venture capital fund.
Income covered: Income from investment in a qualifying venture capital undertaking, within the applicable wording of Section 10(23FB).
Extent: Qualifying income is exempt at fund or company level, subject to the statutory conditions.
Investor taxation: Separate pass-through rules may apply.
Meaning of Section 10(23FB)
Section 10 lists income that is excluded from total income under the Income-tax Act, 1961. Clause 10(23FB) addresses qualifying venture capital funds and venture capital companies. Its scope has changed over time; therefore the law in force for the relevant assessment year, rather than a simplified historical description, controls entitlement.
The exemption was designed for eligible investment vehicles investing in venture capital undertakings. It does not provide a blanket exemption for every private equity vehicle, alternative investment fund or start-up investor.
Eligible entities and statutory definitions
Venture capital company
Historically, the expression covered a company registered under the applicable securities-law framework and meeting prescribed conditions. The specific definition and registration regime must be checked for the year concerned, including the transition from earlier SEBI venture capital fund regulations to the alternative investment fund framework.
Venture capital fund
A venture capital fund is an investment vehicle satisfying the applicable statutory definition and regulatory registration conditions. Earlier provisions referred to funds constituted under trust deeds or specified schemes and registered with the Securities and Exchange Board of India (SEBI). Subsequent amendments affected which funds and investments qualify.
Venture capital undertaking
In the historical framework, a venture capital undertaking generally referred to a qualifying domestic company whose shares were not listed on a recognised stock exchange and which carried on permitted business activities. The exact definition, exclusions and eligible sectors vary by the relevant version of the law.
Nature and amount of exempt income
| Eligible assessee | Qualifying venture capital fund or venture capital company under the applicable statutory definition. |
|---|---|
| Nature of income | Income from investment in a venture capital undertaking, to the extent covered by the law for the relevant year. |
| Exemption amount | Qualifying income in full; this is not an unconditional exemption of every receipt. |
| Principal conditions | Applicable SEBI registration, constitution of the vehicle, qualifying investments and other statutory requirements. |
| Investor implications | Pass-through taxation and reporting can apply under Section 115U or other applicable provisions. |
Conditions for claiming the exemption
- Qualifying legal form: Establish that the claimant falls within the relevant definition of venture capital fund or venture capital company.
- Regulatory compliance: Maintain the SEBI registration and other approvals required by the legislation applicable to that year.
- Qualifying investment: Identify the venture capital undertaking and verify that its status, business and investment meet the statutory tests.
- Income tracing: Document the link between the income and qualifying investments; unrelated income cannot automatically be treated as exempt.
- Records and reporting: Keep registration certificates, trust deeds or constitutional documents, investment records, financial statements and tax disclosures.
Section 115U and taxation of investors
Section 115U of the Income-tax Act, 1961 contained special rules for income received by investors from venture capital companies and venture capital funds. Broadly, relevant income could be taxed in investors' hands in the same nature and proportion as if received directly, subject to the precise version of the law. Consequently, an exemption for the fund should not be confused with a universal exemption for its unit holders or investors.
Other regimes, including provisions concerning investment funds and Category I or Category II alternative investment funds, may instead apply depending on the vehicle, its registration and the tax year. Review the interaction of Sections 10(23FB), 115U, 10(23FBA) and 115UB where relevant.
Illustrative examples
Example 1: A qualifying venture capital fund receives income from an investment in a venture capital undertaking meeting all applicable tests. The fund-level exemption may be available for the relevant year, while investor-level taxation must be evaluated separately.
Example 2: A private investment company invests in an unlisted start-up but does not meet the required statutory definition or registration conditions. It cannot claim Section 10(23FB) merely because the investment is venture capital in a commercial sense.
Example 3: A SEBI-registered alternative investment fund must identify the specific tax regime applicable to its category and period; SEBI registration by itself does not establish entitlement to this historical exemption.
Applicability after the Income-tax Act, 2025
The section number 10(23FB) refers to the Income-tax Act, 1961. The Income-tax Act, 2025 took effect from 1 April 2026. For tax year 2026-27 onwards, consult the corresponding provisions of the new legislation and transitional rules. Older assessments and disputes may still require examination of the 1961 Act as amended for the relevant period.
Frequently asked questions
Is every venture capital fund eligible?
No. The legal definition, registration requirements, investment tests and applicable tax year determine eligibility.
Is all income of a venture capital company exempt?
No. The scope of qualifying income depends on the precise statutory language and applicable amendments.
Are investors exempt because the fund is exempt?
Not necessarily. Investor-level tax treatment is governed separately, including historical pass-through rules in Section 115U.
Does Section 10(23FB) apply unchanged in 2026-27?
No. The Income-tax Act, 2025 applies from 1 April 2026, and the current statutory provisions and transitional rules must be checked.
Official legal and regulatory references
- Income Tax Department: Income-tax Act, 1961 (Section 10(23FB), Section 115U and applicable amendments).
- India Code: central legislation (including the Income-tax Act, 2025).
- Securities and Exchange Board of India (fund registration and applicable regulations).
- Income Tax e-Filing Portal.
Tax treatment depends on the investment vehicle, its registration, the nature of income and the legislation applicable to the relevant tax year. This article is general information, not a substitute for reviewing the operative law.