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Startup India: Eligibility, Tax Exemptions, and Incentives

Updated on: 23 May, 2024 05:23 PM

The Indian Government launched the Startup India campaign in 2016 with the objective of boosting entrepreneurship in the country. Under this initiative, the government has introduced many benefits and tax exemptions for startups in India. This article covers the various tax exemptions for startups available in India.

What is a Startup?

A startup is a new business formed with the objective of selling a single product or service that the founders believe is in demand. However, for the purposes of taxation and for availing of other government benefits, a startup must fulfill the following conditions -

  • The company’s age should be less than 10 years. Simply put, the company must have completed less than 10 years from the date of incorporation/registration.
  • The company must be registered either as a private limited company, limited liability partnership, or partnership firm to be eligible for startup-related benefits.
  • Its annual turnover for any year after incorporation should not exceed ₹100 crores.
  • The startup should be engaged in working toward the development and innovation of products and services.
  • The company should not be formed by reconstruction or splitting up an existing company.

Eligibility for Startup India

To be recognized as a Startup under the Startup India Action Plan, a company must meet the following requirements:

  • Young Company: The company must be in operation for ten years or less from its incorporation/registration date.
  • Business Structure: The company must be a private limited company, a registered partnership firm, or a limited liability partnership.
  • Financial Threshold: The company's annual turnover must not exceed Rs. 100 crore in any financial year since its inception.
  • Innovation Focus: The company's core activity should involve innovation, development, or improvement of products, processes, or services. Alternatively, it can have a high-growth business model with the potential to create significant employment opportunities or wealth.
    The company shouldn't be formed by dividing or restructuring an existing business.

What are the Tax Exemptions for Startups?

In order to promote the Startup India program and the Make in India program, the Indian government has announced various tax exemptions for startups in India. Here are the various exemptions available to startups -

  • A Tax Holiday of 3 Years
    Any startup registered or incorporated between April 1, 2016, to 31st March 2022, is eligible to claim this benefit. Such startups can get a 100% tax exemption on their profit for 3 years in a block of 7 years. However, the company's total turnover must not exceed 25 crores in a financial year. Shortage of funds is one of the most challenging aspects of running a startup. A tax holiday of 3 consecutive years helps startups set up their business without much trouble.
  • Exemption on Long-term Capital Gains
    The government introduced an exemption from tax on long-term capital gains under a new section 54EE. This section states that all eligible startups can claim exemption frm long-term capital gains tax if the gains are invested in a fund specified by the central government within 6 months from the transfer date. The maximum investment amount is restricted to 50 lakhs and should be kept invested in the fund for 3 years. In case the money is withdrawn before the completion of 3 years, the exemption granted will be revoked.
  • Exemption on Investments Above FMV
    The tax on investments above fair market value is exempt from tax for startups. These investments include investments by angel investors, investments by incubators, and investments by funds and individuals not registered as venture capital (VC) funds.
    In simple terms, investments made by angel investors by paying more than the company's fair value is exempt from tax. This helps startups have more funds for running their operations.
  • Tax Exemption Under Section 54GB
    As per Section 54GB of the Income Tax Act, if any individual/HUF sells a residential property and uses the amount to invest in SMEs or purchases 50% or more shares of eligible startups, they will be exempt from paying long-term capital gains. However, the exemption will be available only if the shares are not sold for 5 years from the date of acquisition.
    The startups must also use the amount invested for purchasing assets and not sell or transfer such assets before 5 years of purchase.
  • Set-off of Carry Forward Losses Allowed
    As per section 79 of the Income Tax Act, a company can carry forward its losses if -
    The shareholders who had voting power in the year when the loss was incurred are in possession of their shares on 31st March of the year in which it is to be carried forward, and the loss has been incurred across 7 years of the company’s incorporation.
    If you are a startup owner trying to figure out your taxes, hire an eCA and get the best financial advice and get assisted during e filing income tax return for your business for maximum tax savings.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.