Income Tax on Crowdfunding - Crowdfunding Regime In India

What is Crowdfunding in India?

Crowdfunding is a method of financing where business ventures can raise money from different people. Under crowdfunding, people either donate or invest through a crowdfunding platform. This platform acts as an intermediary between the two.

In other words, crowdfunding is a way of financing a business, project, or cause. In addition to the above, it also improves the business’s presence across social media platforms. The process is somewhat similar to that of P2P lending, except that in P2P lending, investors receive interest on their investments.

Here’s an example to help understand how crowdfunding works in India -

Suppose a person in your locality starts a new business; he or she can raise funds from the people of the society or through crowdfunding websites to establish his/her business. People can either donate some amount or invest in the startup. In the case of investment crowdfunding, the investor will receive an interest on the investment amount.

What are the Types of Crowdfunding?

There are different types of crowdfunding. It is majorly divided into 3 parts -

Equity-Based Crowdfunding

Equity-based crowdfunding is a type of funding where a company that is not listed on the stock market allows investors to buy or invest in it. If the company performs well and makes a profit, the investors get to earn interest on their investment. Equity-based crowdfunding is different from other types of crowdfunding as it involves selling a percentage of your business share in return for your investment. Equity-based crowdfunding can further be divided into 2 types -

• Accredited Crowdfunding - Under this type of funding, the company raises funds only from high-net-worth individuals or accredited investors.
• Open Access Regulated Crowdfunding - Under this type of funding, any individual who wants to invest can invest the money in the company in exchange for equity shares of that company.

Donation Based Crowdfunding

Donation-based crowdfunding is a type of funding process where the public is expected to donate a small amount voluntarily for a certain project or cause without expecting to receive anything in return. In other words, donors can contribute to or support a cause that they believe in. Such funding is generally used by NGOs, non-profit organizations, or charitable institutions. It is used to raise funds for social, medical, personal, and creative purposes. This can be done by running a donation campaign on social media.

Reward Based Crowdfunding

Crowdfunding, a method of small business fundraising, involves entrepreneurs seeking financial support online from individuals in exchange for a product or service. Through crowdfunding platforms, entrepreneurs present their business ideas or projects along with a fundraising target. In return for contributions, businesses offer rewards to donors, such as trending clothing or handmade jewelry. This approach is particularly attractive to startups that may not qualify for traditional small business loans but have innovative projects with the potential to make a societal impact. Anyone can contribute to these reward-based crowdfunding campaigns and share them on social media to expand their reach. While crowdfunding platforms typically charge fees ranging from 5% to 13% of the raised amount, additional charges may apply depending on the platform chosen for fundraising.

Is Crowdfunding Legal in India?

Now that you understand the meaning of crowdfunding and the types of crowdfunding, you must be wondering, is crowdfunding legal in India? The answer is ‘yes’. Crowdfunding is legal in India except in some cases. While donation and reward-based crowdfunding are safe, secure, and legal in India, digital equity-based crowdfunding platforms are unauthorized in India by SEBI. In other words, digital equity-based crowdfunding is illegal in India, and there is no restriction on donation or reward-based crowdfunding.

What are the Benefits of Crowdfunding?

• Crowdfunding simplifies financial processes by eliminating the need for traditional banking systems reducing tedious procedures.
• It operates efficiently, saving time and resources while simultaneously fostering innovation and entrepreneurship.
• Small and medium-scale industries benefit from crowdfunding, as it aids in their growth and progress.
• Crowdfunding initiatives contribute to the enhancement of ease of doing business policies.
• Various applications of crowdfunding include funding creative projects such as blogging, journalism, music, and independent films, as well as supporting startup companies.
• Crowdfunding serves as a means for individuals to give back to society and provides creators with access to low-cost capital.
• It generates greater publicity, strengthens customer bases, and facilitates employee recruitment for businesses.
• Platforms like AgFunder offer opportunities for investment in food and agriculture-related ventures on a global scale.
• Crowdfunding promotes inclusivity by bypassing biases in community networks.
• Reduced costs are a key benefit of crowdfunding, as it diminishes search and transaction costs, encouraging higher market participation.
• Neglected markets become accessible to individual investors through crowdfunding initiatives.
• Investor contributions through crowdfunding add value to companies, thereby increasing their overall worth.

What is the Income Tax on Crowdfunding in India?

As per the Income Tax Act, all the NGOs and non-profit organizations raising funds from crowdfunding platforms are fully exempt from tax. However, if an individual receives contributions from the crowdfunding platform for any reason in India is subject to tax. Contributions made to non-profit establishments or charitable institutions are eligible for tax deductions under section 80G of the Income Tax Act. However, as per the Finance Act 2017, donations exceeding ₹2000 in cash are not eligible for tax deductions in India, aiming to promote digital transactions. Legalized donation-based crowdfunding is widely embraced by individuals and NGOs seeking funds for personal and social causes.

If you want to learn about how to save taxes on crowdfunding or need help reporting crowdfunding in your ITR, you can take help from our tax experts who can help you plan your taxes and file your ITR smoothly and effectively. Hire an online CA now!