Startup Funding · India
Convertible Notes in India: 2026 Rules, Process & Taxation Guide
Quick answer: A DPIIT-recognised startup can issue a convertible note to any investor — Indian or foreign — with a minimum of ₹25 lakh per tranche. The note converts into equity or is repaid within 10 years. No valuation report is needed at issue, angel tax no longer applies to any fund raise, and if the money comes from abroad, the company must file Form CN, then PAS-3 and FC-GPR at conversion, then an annual FLA return every year the investment is outstanding.
This guide is for founders of DPIIT-recognised startups raising an angel or bridge round, and for the investors evaluating a convertible note as the instrument. It covers eligibility, the full regulatory chain from issue through to conversion, a worked share-price calculation, taxation, and how a note compares against a CCD, CCPS, and iSAFE.
1. What is a convertible note in India?
A convertible note records money received by a startup initially as debt, which is repaid or converted into equity shares within 10 years of issue. The investor pays at least ₹25 lakh today and receives shares later — usually at the next priced round, at a discount or against a valuation cap.
It is India's closest legal equivalent to a US SAFE note, with one structural difference: a SAFE is pure future equity, while an Indian convertible note starts life as debt, giving the investor the option to demand repayment instead of shares. It is governed by Section 62(3) of the Companies Act 2013, the Companies (Acceptance of Deposits) Rules 2014, and — for foreign money — the RBI's FEMA Non-Debt Instruments Rules 2019.
2. Who can issue and invest in a convertible note?
Only startups recognised by DPIIT can issue convertible notes — the entity must be under 10 years old with turnover that has never crossed ₹100 crore in any financial year. Without recognition, the money risks being reclassified as an illegal deposit under the Companies Act. If you're not yet recognised, Startup India registration typically takes 7–10 working days.
Investors can be resident Indians, Indian companies, NRIs, or foreign nationals — the only exclusion is citizens or entities of Pakistan and Bangladesh. Foreign investment also requires the startup to operate in a sector open to 100% FDI under the automatic route.
3. Which instrument is right for you? — Quick verdict
| Your situation | Recommended instrument |
|---|---|
| DPIIT-recognised, investor writing ₹25 lakh+, need money fast | Convertible note |
| Not DPIIT-recognised, or investor ticket below ₹25 lakh | CCD |
| Want zero repayment risk on the balance sheet | CCD |
| Raising ₹5 crore+ from an institutional/VC investor | CCPS |
| Angel syndicate round via 100X.VC or similar platform | iSAFE (CCPS-based) |
| US-incorporated entity raising from US investors | SAFE (not valid for an Indian entity) |
4. Conditions to issue a convertible note
- DPIIT recognition valid on the date of issue.
- ₹25 lakh minimum per investor, per tranche — cannot be built up through smaller instalments from the same investor.
- 10-year maximum tenure — convert or repay within 10 years of issue.
- Written instrument recording interest, conversion, and repayment terms.
5. The complete process — issue through to annual reporting
Most guides stop at the point the money lands. The obligations don't — here is the full chain, in order:
- Confirm DPIIT recognition is valid.
- Fix the commercial terms — amount, interest, discount (typically 15–25% on the next round's price), valuation cap, conversion triggers.
- Draft the note agreement covering conversion, liquidation preference, transfer restrictions, and repayment.
- Pass the board resolution approving the issue and calling an EGM.
- Pass a special resolution at the EGM under Section 62(3).
- File Form MGT-14 with the ROC within 30 days of the resolution.
- Receive the funds and issue the note — the full tranche must land before the note is issued.
- File Form CN with RBI (foreign investors only) — on the FIRMS portal within 30 days of receipt, with a CA/CS certificate, the FIRC, and KYC.
- Get a valuation report from a SEBI-registered merchant banker or CA before the conversion resolution — not after.
- Allot shares and file Form PAS-3 with the ROC within 30 days of allotment.
- File Form FC-GPR (foreign investors only) on the FIRMS portal within 30 days of the same allotment date — this step is missed by a surprising number of otherwise-thorough guides.
- File the annual FLA return by 15 July every year the foreign investment remains outstanding, whether still a note or already converted to equity — this continues even in years with no activity.
Steps 1–7 typically close in 5–7 working days. You can download our sample note agreement, and our CCD & Convertible Notes service manages every step above end to end, including the FLA return that most founders forget the year after conversion.
6. Do you need a valuation report to issue a convertible note?
No — this is the main reason founders choose a note over CCPS. Since no shares are priced at issue, no valuation report is needed, saving roughly 5–7 days and ₹15,000–40,000.
A valuation is required at two later points: at conversion into equity shares (see our valuation report guide), using the DCF or NAV method under Rule 11UA; and if the note itself is transferred to or from a non-resident, from an IBBI-registered valuer.
7. Costs to issue a convertible note
| Cost item | Typical range (INR) | When paid |
|---|---|---|
| Drafting the note agreement | ₹15,000 – 40,000 | Before issue |
| Secretarial work (resolutions, EGM, MGT-14) | ₹8,000 – 15,000 | At issue |
| MGT-14 government filing fee | ₹300 – 600 | At issue |
| Stamp duty (state-dependent) | ₹500 – 2,000 | At issue |
| Form CN + CA/CS certificate (foreign money) | ₹7,000 – 20,000 | Within 30 days of receipt |
| Total at issue | ₹30,000 – 80,000 | — |
| Valuation report (deferred) | ₹15,000 – 40,000 | Before conversion |
| PAS-3 + FC-GPR at conversion (foreign money) | ₹10,000 – 20,000 | Within 30 days of allotment |
| Annual FLA return | ₹5,000 – 10,000/year | By 15 July, every year outstanding |
8. Taxation of convertible notes
Angel tax no longer applies. Section 56(2)(viib) was abolished by the Finance Act 2024 for all fund raises from 1 April 2025, for resident and foreign investors alike. Notes converted before that date can still face legacy assessments.
Interest is taxable and carries TDS. For residents, the company deducts 10% TDS under Section 194A once interest crosses ₹5,000 in a year; for non-residents, TDS applies under Section 195 at the applicable treaty rate.
Conversion itself is not a taxable event for the company. The investor's capital-gains clock runs from the terms of acquisition, and the discount received at conversion is not taxed as income at that point under current practice.
9. Convertible note vs CCD vs CCPS vs iSAFE
| Feature | Convertible Note | CCD | CCPS | iSAFE |
|---|---|---|---|---|
| Conversion | Optional | Compulsory | Compulsory / fixed at issue | Compulsory (CCPS-based) |
| Who can issue | DPIIT-recognised startups only | Any company | Any company | Any company, via 100X.VC template |
| Minimum ticket | ₹25 lakh per tranche | None | None | None |
| Valuation at issue | Not required | Required for foreign investors | Required | Required for foreign investors |
| Process time | 5–7 working days | 15–20 days | Special resolution + Form SH-7 + stamp duty | 10–15 days |
| Repayment risk to founder | Yes, until converted | No | No | No |
Our rule of thumb: below ₹25 lakh or not DPIIT-recognised, use a CCD. Above ₹5 crore from an institutional investor, use CCPS. For a fast angel round of ₹25 lakh–₹2 crore where you're DPIIT-recognised, the convertible note is genuinely the right tool.
10. Worked example — conversion at a Series A
Facts: Trikona Analytics Pvt. Ltd. raises ₹50,00,000 from an angel investor via a convertible note in July 2024. Terms: 7% p.a. interest, ₹8 crore valuation cap, 20% discount, maturity July 2034. Trikona raises a Series A of ₹2 crore at a ₹12 crore pre-money valuation in April 2026, with 1,00,000 fully diluted shares outstanding at that point.
- Series A share price: ₹12,00,00,000 ÷ 1,00,000 = ₹1,200/share
- Cap-implied price: ₹8,00,00,000 ÷ 1,00,000 = ₹800/share
- Discount-implied price: ₹1,200 × (1 − 0.20) = ₹960/share
- Lower of the two applies: ₹800 < ₹960 → converts at ₹800/share
- Shares issued: Principal ₹50,00,000 + ~21 months' accrued interest (≈₹6,13,700) = ₹56,13,700 ÷ ₹800 ≈ 7,017 shares
A Series A investor putting in the same ₹56 lakh at ₹1,200/share would get only 4,678 shares. The note holder's early-risk reward is roughly 2,339 additional shares — about 33% more equity for the same rupee amount. This is exactly why the cap, not the discount, decides outcomes when a company's valuation moves quickly between issue and conversion.
11. Common mistakes founders make
Based on 300+ fund raises we've advised on, these are the errors that recur most:
12. Issue checklist
13. Frequently Asked Questions
What is a convertible note in India?
A convertible note is an instrument issued by a DPIIT-recognised startup that records money received initially as debt, convertible into equity shares or repayable within 10 years of issue. The minimum ticket is ₹25 lakh per investor in a single tranche. It sits outside the Companies Act's definition of a deposit, which is what makes it fast to issue.
What is the minimum investment for a convertible note in India?
₹25 lakh per investor, in a single tranche. This cannot be built up through smaller instalments from the same investor — each tranche independently has to cross ₹25 lakh.
What is the maximum tenure of a convertible note?
10 years from the date of issue. The original limit was 5 years; it was extended to 10 in 2019 and many guides — including older versions of this one — still quote the outdated figure.
Is a valuation report required to issue a convertible note?
No valuation report is required at issue. One is required later, at conversion into equity shares (Rule 11UA, DCF or NAV method), and again if the note itself is transferred to or from a non-resident, from an IBBI-registered valuer.
Does angel tax apply to convertible notes?
No. Section 56(2)(viib) was abolished by the Finance Act 2024 for all fund raises from 1 April 2025, for resident and foreign investors alike. Notes converted before that date can still face legacy assessments.
What forms must be filed when a foreign investor holds a convertible note?
Form CN with the RBI within 30 days of receiving the funds; Form PAS-3 with the ROC within 30 days of allotment at conversion; Form FC-GPR within 30 days of that same allotment; and an annual FLA return by 15 July every year the investment remains outstanding.
Can convertible notes be issued to resident Indian investors?
Yes. Convertible notes can go to resident Indians, Indian companies, NRIs, and foreign investors. The only exclusion is citizens or entities of Pakistan and Bangladesh. The ₹25 lakh minimum applies across the board.
What is the difference between a convertible note and a CCD?
A convertible note is optionally convertible and restricted to DPIIT-recognised startups; a CCD must convert into equity, can be issued by any company, and has no ₹25 lakh floor. CCDs take longer to issue but leave founders with no repayment risk.
What happens if a convertible note is not converted within 10 years?
It must be repaid in cash. For a non-resident holder, a note left unconverted and unrepaid past 10 years becomes non-compliant foreign debt under FEMA, exposing the company to compounding proceedings.
Can a company without DPIIT recognition issue a convertible note?
No. Only DPIIT-recognised startups can issue convertible notes — without recognition, the money risks being reclassified as an illegal deposit under the Companies Act. A non-recognised company should use a CCD or a priced equity round instead.
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CA Rohit Lohade is a Chartered Accountant specialising in startup fund raising, FEMA compliance, and cross-border structures. He has advised 300+ companies on incorporation and fund raising in India, including convertible note and CCD issues for domestic and foreign investors. LinkedIn profile