The convertible note is India’s only true “raise now, price later” instrument – and it is a licensed privilege. Only DPIIT-recognised startups can issue CNs; each investor must put in at least ₹25 lakh in a single tranche; the note must convert or be repaid within 10 years; and foreign subscriptions have their own rule (Rule 18, NDI Rules 2019) with a dedicated filing – Form CN – on the FIRMS portal. Get those four things right and the CN is the fastest clean way to close early money. This guide covers the law, the commercial terms, the filings and the tax, as they stand in July 2026.
The legal frame in one table
| Parameter | Rule | Source |
|---|---|---|
| Who can issue | Only DPIIT-recognised startups (else the money is a deposit / impermissible) | Deposit Rules 2(1)(c)(xvii); NDI Rule 18 |
| Minimum ticket | ₹25 lakh per investor in a single tranche – no splitting, no aggregation of smaller cheques | Deposit Rules definition; NDI Rule 18(1) |
| Tenure | Convert into equity or repay within 10 years of issue (FEMA moved first – NDI Amendment Rules, April 2022; Deposit Rules aligned August 2022) | NDI rule 2(e); Deposit Rules |
| Foreign investors | Permitted; sector must be under 100% automatic route (else approval); land-border investors need prior government approval | NDI Rule 18; PN3 |
| NRI/OCI | Expressly allowed on non-repatriation basis under Schedule IV – domestic treatment | NDI Rule 18(4) |
| Reporting | Form CN on FIRMS within 30 days of issue to a non-resident; also within 30 days of any transfer involving a resident | RBI reporting framework |
| On conversion | Allotment of equity/CCPS → FC-GPR within 30 days (foreign holders) | NDI reporting |
Commercial terms that actually matter
Discount: 15–25% to the next qualified round’s price is the Indian norm – the note-holder’s reward for early risk. Valuation cap: the maximum price at which the note converts; a ₹40 crore cap on a round priced at ₹60 crore means the note converts at ₹40 crore economics. Discount-plus-cap (holder gets the better of the two) is now standard. Qualified round definition: set a minimum size (say ₹4 crore of new money) so a token allotment cannot force conversion. Long-stop: what happens at maturity if no round arrives – conversion at a pre-agreed valuation, extension, or repayment. Repayment is legal but usually theoretical; draft the long-stop conversion honestly instead. Interest: permitted but uncommon in venture CNs; if used, it is taxable interest with TDS obligations.
Issuance mechanics, step by step
(1) Confirm live DPIIT recognition – the certificate, not just the application. (2) Board approval and a special resolution authorising the CN issue (treated as private-placement discipline in practice). (3) Execute the convertible note agreement – ticket ₹25 lakh+ per investor, single tranche each. (4) Receive funds through banking channels; for foreign investors, an FDI-compliant inward remittance with KYC. (5) File Form CN on FIRMS within 30 days for each non-resident subscription (the company files; on later transfers between residents and non-residents, the resident party files within 30 days). (6) Maintain the CN register and disclose in financial statements as a financial liability until conversion. (7) On the qualified round: convert per formula, allot, file FC-GPR within 30 days for foreign holders, PAS-3 for the allotment. Miss a FEMA clock and the late-submission fee applies – small if caught fast, painful if found in Series A diligence.
Tax treatment (FY 2026-27)
For the company: CN proceeds are borrowings, not income; no angel-tax issue exists for post-FY-2024-25 raises and none was re-enacted in the Income-tax Act 2025 – but keep KYC and source documentation for s.102 (old s.68) credit-worthiness scrutiny. For the investor: nothing happens at subscription; conversion is not a transfer (s.70, old s.47(x)) so no tax on conversion; on eventual sale, the unlisted-share rules apply – 12.5% LTCG beyond 24 months, slab STCG within. One nuance worth planning: the holding period of the equity received on conversion is generally counted including the note period under the s.70 framework read with the cost-carry-over rules – document acquisition dates carefully at conversion so the 24-month clock is defensible. Interest, if any, is taxable as income from other sources with TDS at 10% (domestic) or treaty rates (foreign).
CN vs the alternatives
Against iSAFE: the iSAFE exists precisely because of the CN’s ₹25 lakh floor and DPIIT gate – smaller cheques ride CCPS rails instead. Against CCPS: a priced CCPS round beats a note when a credible lead is already setting terms. Against CCD: CCDs suit structured and parent-funding situations, not valuation deferral. The one-page decision version is the instrument chooser; where notes sit in the overall journey is the stages guide.
Issuing or subscribing to a convertible note?
My Cloud Accountant drafts CN agreements, runs the DPIIT and FEMA checks, and files Form CN and the conversion paperwork on time.
Talk to an expertFrequently Asked Questions
Can two investors put in ₹12.5 lakh each to meet the ₹25 lakh floor?
No. The ₹25 lakh minimum applies per investor, in a single tranche. Two ₹12.5 lakh cheques are two non-compliant notes – the money risks deposit treatment. Pool smaller cheques through a syndicate SPV (which then invests ₹25 lakh+) or use an iSAFE/CCPS structure instead.
What if our DPIIT recognition lapses while notes are outstanding?
Recognition matters at issuance – a validly issued note does not retroactively become a deposit when the company outgrows the startup definition (now 10 years / ₹200 crore). But do not issue fresh notes after losing recognition, and convert outstanding ones on schedule.
Can a foreign investor’s CN be repaid instead of converted?
Yes – repayment at maturity is permitted (the instrument allows “repay or convert” within 10 years). Repatriation of the repayment follows normal banking-channel rules. What is not permitted is a guaranteed assured return dressed as repayment – interest, if any, should be commercially sensible.
Does an NRI investing via Schedule IV need to file Form CN?
Non-repatriation investment under Schedule IV is treated as domestic capital, and the Form CN framework is built around non-resident (repatriable) subscriptions. Practice varies at AD banks – confirm with the bank whether they expect a filing for a Schedule IV note; our experience is they generally do not, but get it in writing.
Last reviewed: July 2026. Rule 18 and rule 2(e), FEM (NDI) Rules 2019 (as amended April 2022); Companies (Acceptance of Deposits) Rules 2014 (as amended); RBI FIRMS reporting framework; Income-tax Act 2025.