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Tax Incentives to Startups in India

Tax Incentives 1

A startup is determined as a young company, generally small, coined by one or more entrepreneurs to evolve a unique product or service, and initially funded by such entrepreneurs or their friends or families. What differentiates a startup from others is that it offers a product or service that is not provided by any other business the same way. The deriving word for a startup is Innovation.

Startup India Scheme
On January 16, 2016, the Govt. of India, under the Governance of PM Narendra Modi, started putting efforts in the wake of attracting talented and skilled entrepreneurs and promoting and uplifting startups in India. Eventually, the Government of India launched the “Startup India Scheme” for generating employment and wealth in the nation.

Startup India Scheme focuses on the development of products and services and increasing rate of employment in India by stressing on simplification of work, financial support, network opportunities and Government tenders.

According to the notification issued by the Department for Promotion of Industry and Internal Trade (DPIIT) on February 19, 2019, the following conditions are required to be satisfied for a startup to refer as a “Recognized Startup”:

  • An entity must be registered in India as a startup for 10 years in the form of a private company, partnership firm or an LLP.
  • The startup company must not have a turnover of more than ₹100 crores during any of the said 10 years.
  • The aggregate amount of share capital and premium of the startup company should not exceed ₹25 crores in any of the 10 years.
  • The startup company must submit Form 2 with DPIIT which shall automatically be sent to the CBDT to take exemption from angel tax.
  • The company is not the result of restructuring or split­-up of a business, and it means it should be a new company.
  • The aim of Startup Company should be to work towards innovative products or services, improvement in product and services.
  • There should be a scope of scalability in business, and the company should be a commercially exploitable project.

Significant benefits for recognized startups in India
Once a startup starts its business, it can avail many taxes and other benefits offered by the Government of India. Some of the unique services that a startup can help are illustrated below:

  • Relieve from angel Tax
    Angel tax is levied on the amount received more than the fair market value of freshly issued shares and is taxable under Section 56(2) of the income-tax Act, 1961 under the head income from other sources. A recognized startup company is relieved from paying such angel tax.
  • Tax holiday for 3 years
    Under section 80 IAC of the Income-tax Act, 1961, an eligible startup shall be allowed to get a 100% tax holiday on the income of any 3 consecutive years out of 10 years(7 years w.e.f. April 01, 2021) beginning from the year in which the eligible startup is incorporated.  This tax holiday is given to strengthen the startup and meet its capital requirement. However, the recognized startup opting for a tax holiday for 3 years:

    • Is incorporated on or after April 01, 2016, but before April 01, 2021.
    • Should not have a turnover exceeding ₹100 crores (25 crore w.e.f. April 01, 2021) in the previous year relevant to the assessment year for which deduction is claimed.
    • A certificate of eligible business is held from the Inter-Ministerial Board of Certification.
  • Long term capital gains on tax exemption
    A recognized startup is eligible to get tax exemption on long term capital gains under below-mentioned sections of Income-tax Act, 1961:

    • Section 54 EE
      If a startup invests the long term capital gain on sale of an asset in the long term specified assets subject to maximum investment up to ₹50 lakh, then such capital gain is exempted from tax. However, the investment should be retained for at least 5 years.
    • Section 54 GB
      Suppose an individual or a HUF invests the long term capital gain on sale of his property into an eligible startup. In that case, such capital gain is exempted from tax in the hands of such individual or HUF. However, the investment is subject to a minimum lock-in period of 5 years.
  • Waiver of 80% of fees for patents
    Mostly, the startups are patent-based and to get their patent registered, they may need to incur high costs. But, the government permits a recognized startup to get 80% rebate on patent costs. The DIPP will bear the facilitation costs for startups and provide refunds in filing fees. Moreover, the government assists such startups in registering their patent by simplifying the process for them.
  • Access to Government tenders
    Under the Startup India Scheme, the startups were given the privilege to apply for government tenders irrelevant to their experience.
  • Networking opportunities
    The government provides network opportunity by conducting 2 startups fests annually at domestic and international level.
  • Fast-track insolvency process
    Under the insolvency and bankruptcy code 2016, startups get a chance to close their business within 90 days of applying closure of their company if they are continuously suffering losses or the startup has failed.

At AJSH, we assist our clients in setting up their businesses in India and ensuring they comply with all statutory requirements in a timely manner, including tax compliances for startups, tax assessments, tax advisory and other related services by providing them adequate support by our end. If you have any questions or wish to know more about Tax incentives in startups, kindly contact us.


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