“Is crowdfunding legal in India?” – Do you want to drive funds with crowdfunding but worrying about Indian laws? Well, every country has its own laws for crowdfunding.
Crowdfunding is directly related to money. It’s all about collecting money from many people to run your business or any project. So, you should consider the legal things also when it comes to money matters.
In my current blog, I discuss if crowdfunding is legal or not in India and which things you have to consider while raising funds from crowdfunding.
Is Crowdfunding Legal in India?
Yes, crowdfunding is legal in India but there are some laws that you should consider. However, equity crowdfunding is not legal in India as per SEBI guidelines. So, you should know the rules and laws before raising funds from the crowd.
4 Types of Crowdfundings are Legal in India That You Should Know
Let’s see when and how crowdfunding is legal in India. You should always follow the rules of RBI and SEBI if you are dealing with money matters in India.
1. Social or Donation Lending Crowdfunding is Legal in India
This types of crowdfunding involve donations. People come forward and donate money to support a cause. This can be considered as social work to help needy people.
So, this type of donation crowdfunding is legal in India. For example – raising funds through crowdfunding for a sick person.
2. Reward Crowdfunding is Legal in India
Reward crowdfunding means where people donate money and in return get rewards in the future or immediately. This type of reward crowdfunding benefits the donors and also fundraisers.
This is legal in India. One can choose the reward crowdfunding option to collect money. Examples of reward crowdfunding are- getting one-year membership for a sports club or getting a free copy of a book.
3. Pre-Order Crowdfunding is Legal in India
Pre-order crowdfunding means where people give money in order to receive the product after manufacturing. It is legal in India. One can raise funds through the pre-order crowdfunding process in India.
Let’s see an example of pre-order crowdfunding – Pre-order of books. You will get the book after publishing and printing but you have to pay money and pre-order it.
4. Debt Crowdfunding is Legal in India
Debt crowdfunding refers to peer-to-peer lending. In this one can get a loan and then he should return it in future days along with interest. And also one should apply for such funds to get approval from the lender.
This we can consider as unsecured loans. And such debt crowdfunding is legal in India as NBFC provides a license to the platforms for such peer-to-peer lending. So, one who has such a license can lend money and it is legal.
Equity-Based Crowdfunding is NOT Legal in India
Equity-based crowdfunding is illegal in India. SEBI (Securities and Exchange Board of India) considers this as unauthorized. SEBI wants to protect the interest of investors so it has made such rules.
Usually startups or businesses, in the beginning, try to collect equity-based crowdfunding. This means they give equity shares to people and raise money. And donors will get profit or loss in the future days.
But according to SEBI, this is illegal in India. Businessmen or start-ups should not involve in equity crowdfunding because this is considered an unregulated investment.
So, it has to be done only by registering under SEBI. You can check more information about equity-based crowdfunding on the official website.
Why is equity crowdfunding illegal in India?
Equity crowdfunding is illegal in India because SEBI does not give permission for such crowdfunding. SEBI wants people’s money to be safe. But in such equity crowdfunding chances are more that investors will face high risk and will not get proper maintenance for their invested money.
This is why the intention of SEBI is that any common investor should not trap for such unregulated equity crowdfunding. So, it is considered illegal in India.
Who Can Raise Funds Through Crowdfunding According to Indian Laws and Rules?
Well, when it comes to donation crowdfunding, reward crowdfunding and pre-order crowdfunding anybody can do this. As these are legal in India. So, anybody can become a donor or investor here in these three types of crowdfunding processes.
Also, if you want to raise funds through these three types of crowdfunding then you can do it. It’s legal. For example, if you want to raise funds for a sick person you can do that.
Is Crowdfunding Taxable by the Indian Government?
No, crowdfunding is not taxable in India if the amount is up to 50,000 rupees. As this is considered a gift. But if the amount is more than 50,000 rupees then it is taxable.
And as per the current tax regulations in India, a non-profit organization that raises money from crowdfunding is not taxable. It’s tax-free.
And if you are an individual and receiving donations through any platform then you should pay income tax if the platform or company does not come under a non-profit organization.
Know About Tax On Crowdfunding on Donors in India
Well, the tax for donors depends on the organizations where you will be donating your money. If you are donating to non-profit organizations or charities then it’s tax-free. There will not be any tax on that money.
How to Raise Funds Legally through Crowdfunding in India?
If you want to collect funds legally in India then choose the right type of crowdfunding option for you. As we have discussed that donation crowdfunding, reward crowdfunding and pre-order crowdfunding are legal. So, you can collect funds from these options.
And there are many ideas and ways to raise funds online and offline. But you just need to do it in the right way and legally to drive more funds for your project.
While raising funds if the question ‘is crowdfunding legal in India’ is disturbing you then consider the type of crowdfunding that you are opting for. Analyze if it comes under donation, debt or anything else. Then choose the legal crowdfunding option only.