Tax Benefits for startups in India

India is currently the fifth largest economy in the world. With a sharp increase in startups in India in the last few years, it helped India achieve this step. To promote establishment of startups, there are many attractive tax benefits allowed for them. Promoting and enhancing qualities of entrepreneurship is essential to overall economic health of the country. We will discuss in this article the various tax benefits and tax exemptions provided to startup businesses in the country.

What is a startup?
Startup India is a flagship initiative of the Government of India, intended to catalyse startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship in India.

As per Startup India action plan launched in 2016, a startup is –

  • A company in existence for less than 10 years from its incorporation
  • It is a private limited company, LLP or a registered partnership firm
  • Annual Turnover from incorporation in any year less than Rs. 100 crores
  • Startup engaged in innovation and development of products or services
  • It should be a completely new company 

Tax Exemption to eligible startups:

A startup enjoys numerous tax benefits under income tax such as:

  • A three-year Tax Holiday in a seven-year block:

A startup incorporated between 01/04/2016 and 31/03/2022 is eligible for claiming tax holiday benefit. These startups get a 100% tax exemption on their profit for 3 years in a block of 7 years. However there is a condition to claim this exemption, where the turnover must not exceed Rs.25crores in a financial year.

  • LTCG Exemption:

As per newly introduced section 54EE startups can invest long term capital gains in funds notified by central government within 6 months from the date of sale to claim 100% exemption on such LTCG. Conditions to claim this exemption: i) Maximum Investment allowed is Rs.50Lakhs ii) Lock-in period of 3 years

  • Company incorporated in IFSC:

A startup incorporated in International Financial Service Centre is eligible for 100% deduction from profits for 10 years out of 15 years block.

  • Investment made above FMV “Angel Investment”:

These companies enjoys tax exemptions on amount of investments above Fair Market Value. Such investments include investments made by resident angel investors, investments by incubators, family or funds which are not registered as venture capital funds.

  • Section 54GB Exemption:

If an individual or HUF sells a residential property and invests the capital gains to purchase the 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt subject to the provision that such shares are not sold or transferred within 5 years from the date of its acquisition.

  • Set-off of Carry Forward Losses Allowed:

Eligible startups can also carry forward losses if all shareholders with voting power on the last day of the year held their shares in the year when the loss was incurred. The condition is that the loss has been incurred across 7 years of the company’s incorporation.

  • Section 80 IAC:
  • Section 80-IAC of the Income Tax Act,1961 facilitates eligible startups claiming a deduction of 100% of profits and gains resulting from any entitled business engaged in innovation, development, improved products or services, or a scalable business model with a high potential for employment generation or wealth creation.

To promote innovation and new developments, it is essential to support startup businesses. The best way to support such entities is to provide them relaxation from taxation provisions in order to help them focus on their innovation and business. As a part of Startup India action plan 2016, government has aimed at providing exemptions from tax to eligible startups at various levels.

About Author:
CA Chinmay Shirish Agate
Chinmay Agate is a Practicing Chartered Accountant having 4+ years of experience and expertise in the field of Direct Taxation and Auditing compliances. In the past, he worked in various CA firms and comes with wide industry experience from services, retail to manufacturing to trading where he has handled various complex assignments. He has keen interest in Forex and Derivative knowledge as well as fundamental analysis.

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