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Startup ecosystem · Incorporation

Sec 68, unexplained cash credit: the startup's hidden tax trap

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  1. Facts

    Sec 68: if a sum is credited to the company's books and the company cannot explain its nature and source, it is treated as income and taxed at 60% + surcharge (effective ~78%). This is the most dangerous section for early-stage startups.

  2. Provisions and law

    • IT Act 1961, Sec 68 (now 102) | Sec 56(2)(viib) (now 92) abolished Apr 2025

  3. Analysis

    When it applies: Founder brings in ₹5L "personal savings" as capital. No proper documentation of source. IT dept asks, you cannot explain → 78% tax on that ₹5L. Fix: All founder capital contributions must be documented with ITR, bank statements showing source, and a formal subscription agreement. Angel investments need investor's ITR, bank statement, and PAN.

  4. Conclusion

    1. Investor's PAN, mandatory
    2. Investor's ITR for at least 2 preceding years (showing capacity to invest)
    3. Bank statement showing the funds were transferred from investor's known account
    4. Subscription agreement or share allotment letter
    5. Board resolution approving allotment
    6. For founder capital: own ITR + savings bank statement showing source

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