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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.
Startup ecosystem · Incorporation
Sec 68, unexplained cash credit: the startup's hidden tax trap
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Provisions
IT Act 1961, Sec 68 (now 102) | Sec 56(2)(viib) (now 92) abolished Apr 2025
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.
Close
- Investor's PAN, mandatory
- Investor's ITR for at least 2 preceding years (showing capacity to invest)
- Bank statement showing the funds were transferred from investor's known account
- Subscription agreement or share allotment letter
- Board resolution approving allotment
- For founder capital: own ITR + savings bank statement showing source
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