Startup India: Eligibility, Tax Exemptions, and Incentives

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 2030, is eligible to claim this benefit. Such startups can get a 100% tax exemption on their profit for 3 years out of their first 10 years of incorporation, as per section 80-IAC. However, the company's total turnover must not exceed 100 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.

Do Startups Need to File Income Tax Returns?

Yes. Every startup must file an Income Tax Return (ITR) every year, even if it has not earned any profit or is currently incurring losses.

Filing an ITR is mandatory for startups registered as a Private Limited Company, LLP, or Partnership Firm. Timely filing helps startups claim tax benefits, carry forward business losses, maintain legal compliance, and avoid penalties.

Additionally, startups that wish to claim tax benefits under Section 80-IAC or carry forward losses under Section 79 must ensure that their income tax returns are filed within the prescribed due dates.

Which ITR Form Should a Startup File?

The applicable ITR form depends on the type of business entity:

Startups may also be required to get their accounts audited and file a tax audit report if they meet the prescribed turnover limits under the Income Tax Act.

What Happens If a Startup Does Not File Its ITR?

Failure to file an income tax return can lead to several consequences:

• Late filing fees under Section 234F
• Interest on unpaid taxes under Sections 234A, 234B, and 234C
• Loss of the right to carry forward certain business losses
• Difficulty in obtaining funding, loans, or government approvals
• Increased chances of receiving notices from the Income Tax Department

Even loss-making startups should file their ITR on time to preserve the benefit of carrying forward losses for future years.

Common Income Tax Notices Startups May Receive

Startups may receive notices from the Income Tax Department for various reasons, such as:

• Non-filing of income tax returns
• Mismatch in reported income
• Errors in tax calculations
• High-value transactions reported in AIS or Form 26AS
• Failure to respond to previous notices

Some common notices include:

• Notice under Section 139(9) for defective returns
• Intimation under Section 143(1) after return processing
• Notice under Section 142(1) seeking additional information
• Scrutiny notice under Section 143(2)

Receiving a notice does not always mean that there is a tax problem. However, startups should respond within the prescribed time to avoid further proceedings.

Need Help With Startup Tax Filing?

Managing startup taxes involves more than just filing an ITR. Startups must track expenses, comply with tax regulations, claim eligible deductions, and respond to tax notices whenever required.

Tax2win's tax experts can help startups with:

• Income Tax Return filing
• Tax planning and compliance
• Tax notice response
• Business tax advisory
• Loss carry-forward planning
• Startup tax exemption guidance

Professional assistance can help startups stay compliant while focusing on growing their business.