Guide to Tax Benefits for Startups in India
To help you bear some of this financial strain, the Indian government has instituted various tax exemption initiatives, offering a lifeline to budding entrepreneurs. With a better understanding of tax
Starting a business demands significant capital, a hurdle many aspiring entrepreneurs face. With funds often out of reach, dreams are deferred as one tries to accumulate enough savings to kickstart their venture without resorting to loans. Yet, the delay can be detrimental, as market dynamics evolve or costs escalate beyond affordability. Unfortunately, the expenses inherent in launching a business are unavoidable.
To help you bear some of this financial strain, the Indian government has instituted various tax exemption initiatives, offering a lifeline to budding entrepreneurs. With a better understanding of taxes, startup owners can feel more secure and in control of their finances, which takes a lot of stress out of running a business.
Tax breaks are helpful tools that make it easier for new businesses to start off, without getting weighed down by a ton of taxes. Figuring out these tax benefits and using them advantageously can be a game-changer for startups. It basically means you'll have more money to work with, making it easier to keep your business going over time.
Eligibility Criteria for Indian Startups
To be recognized as a startup in India, your venture must fulfil the following criteria:
Timeframe: The company should not be older than ten years from its date of incorporation/registration.
Legal Structure: It must be either a private limited company, a partnership firm, or a limited liability partnership.
Turnover: The annual turnover should not surpass Rs. 100 crore for any financial year since its incorporation/registration.
Purpose: The company should be engaged in innovating, developing, or improving products, processes, or services. Alternatively, it should have a scalable business model with the potential for significant job creation or wealth generation.
Formation: It should not have arisen from the division or reconstruction of an existing business.
With YNOS startups you can access relevant information on a startup in India, ranging from their industry, location, purpose, and important financials.
Tax Exemptions and Benefits for Startups in 2024
1. Startup India 80-IAC Tax Exemption
Startups in India can apply for tax exemption under section 80 IAC of the Income Tax Act after getting recognized. This means they don't have to pay taxes for three years out of their first ten years since they started.
To qualify for this tax exemption, the startup must be recognized, and only private limited companies or limited liability partnerships are eligible. Also, they must have been incorporated after April 1, 2016.
Initially, only those startups incorporated between April 1, 2016, and March 31, 2021, were eligible. But now, with the extension from Budget 2021, this benefit applies to startups incorporated until March 31, 2022. These startups can get a 100% tax exemption on their profits for three years within a span of seven years, provided their annual turnover doesn't exceed Rs. 25 crores.
During the early years of their existence, when funds are scarce, this tax break assists new businesses in better managing their finances. By doing so, they are able to concentrate on establishing their business without having to worry about taxes to an excessive degree.
2. Angel Tax Exemption (Section 56)
Eligible startups can apply for Angel Tax Exemption, a significant relief for new entrepreneurs. To qualify for this exemption:
The startup must be recognized by the Department of Industrial Policy and Promotion (DPIIT).
The total value of the startup's issued shares, along with any share premium, should not exceed INR 25 Crore.
For startup owners, attracting investment is crucial but challenging. Building investor confidence can be tough, hindering access to capital. To aid startups, the government waived the Angel Tax, relieving angel investors of tax burdens and facilitating capital infusion. Additionally, Section 56(2)(vii)(b) of the Income Tax Act permits shares to be issued above their nominal value, simplifying fundraising efforts.
Since the DPIIT handles startup recognition, startups must directly apply for recognition, avoiding intermediaries. The process is free of charge, and any entity claiming fees for recognition is engaging in illegal activity, subject to legal repercussions. This streamlined approach ensures fair access to benefits without undue financial burden on startups.
3. Capital Gains Exemption (Section 54EE)
Section 54EE of the Income Tax Act offers startup tax exemption on long-term capital gains for eligible startups. According to this section, startups can avoid paying tax on their long-term capital gains if they invest those gains, or a portion of them, in a fund specified by the central government within six months of selling the asset.
Startups can invest a maximum of Rs 50 lakh in this specified fund and must keep the investment there for a minimum of three years. If they withdraw the investment before completing three years, the tax exemption will be cancelled in the year of withdrawal.
In addition to promoting long-term financial stability and encouraging investment in specific funds, this provision offers a tax-saving opportunity for new businesses that are just getting started.
4. Section 54GB Individual, HUF and Startup Tax Exemption
Section 54GB of the Income Tax Act offers tax exemption to individuals or Hindu Undivided Families (HUFs) when they invest their long-term capital gains from selling residential property into eligible startups. Previously, this section only provided exemption for investments in small or medium enterprises under the Micro, Small, and Medium Enterprises Act, 2006. However, it has now been amended to include startups as well.
To qualify for this exemption, individuals or HUFs must invest their capital gains in eligible startups by subscribing to 50% or more equity shares. They must hold onto these shares for at least five years from the date of acquisition, without selling or transferring them. These startups must utilize the investment to purchase assets and refrain from transferring these assets for a minimum of five years from the purchase date.
This tax exemption aims to encourage investment in eligible startups, promoting their growth and expansion. It provides individuals and HUFs with a financial incentive to support the startup ecosystem, potentially yielding long-term benefits for both investors and startups.
5. Investment Tax Exemption above Fair Market Value (FMV)
The Indian government has waived taxes on investments exceeding the fair market value in eligible startups. This exemption applies to investments made by resident angel investors, family members, or funds not registered as venture capital funds, as well as investments made by incubators.
In simple terms, startups won't be taxed on investments that surpass their fair market value. This includes investments from angel investors, family members, and non-registered venture capital funds. Thus, if an investor puts in more money than what the startup is valued at, the extra amount won't be taxed. This measure provides startups with additional funds to support their operations and growth.
Suggested Reads- How To Calculate Valuation of a Startup
6. Exemption on Carry-Foward Losses
According to section 79 of the Income Tax Act, companies can carry forward their losses under certain conditions. These conditions are:
The shareholders who had voting power when the loss occurred still have their shares on March 31 of the year in which the loss is to be carried forward.
The losses must have been incurred within seven years of the company's incorporation.
Similarly, eligible startups can also carry forward their losses if all shareholders with voting power on the last day of the year still hold their shares on that day. This provision allows companies, including startups, to offset their losses against future profits, providing them with some financial relief and encouraging them to continue their operations and pursue growth.
Apart from these business startup tax deductions, the government has also introduced easy and useful government funding options. Tax breaks complement government funding options in a way to makes business ventures feasible for the average entrepreneur.
End Note
The Government of India's actions show that it is seriously committed to building a strong startup ecosystem in the country. With the launch of Startup India and the tax breaks and benefits announced in Budget 2016, the government has shown its commitment to helping entrepreneurs who are having trouble and making it easier for them to become successful.
By making it easier to launch a business, examining patents for less money, and letting companies leave quickly, these steps are meant to make it easier for startups to grow and come up with new ideas. The government strives to boost the economy and encourage long-term growth by promoting the startup lifestyle and using tech-based solutions.