Table of Contents
1. Eligibility for Startup India
2. Tax Exemptions for Eligible Startups under Startup India Program
3. FAQs
The Startup India initiative, launched by Prime Minister Narendra Modi in 2016, aims to foster entrepreneurship in India by providing various benefits, including financial incentives and simplified procedures for company incorporation. One of the most significant advantages offered under this initiative is the tax exemptions available to startups that qualify as eligible under the Startup India Action Plan.
Eligibility for Startup India
To qualify as a startup under the Startup India initiative, a company must meet the following criteria:
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Age of the Company: The startup must be incorporated or registered in India for less than seven years (for biotechnology startups, the limit is ten years).
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Annual Turnover: The startup’s annual turnover should not exceed ?25 crores in any of the preceding financial years.
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Innovation and Development: The startup should be working towards innovation, development, or improvement of products, processes, or services, or it should be a scalable business model with a high potential for employment generation or wealth creation.
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Not a Split-Up: The entity should not be formed by splitting up or reconstructing an existing business.
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Certification: The startup must obtain certification from the Inter-Ministerial Board (IMB) set up for this purpose.
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Entity Type: The startup can be incorporated as a Private Limited Company, a Registered Partnership Firm, or a Limited Liability Partnership (LLP).
Tax Exemptions for Eligible Startups under Startup India Program
Once a startup is recognized as eligible under the Startup India scheme, it can avail of several tax benefits, which include:
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Three-Year Tax Holiday: Eligible startups incorporated after April 1, 2016, can benefit from a 100% tax rebate on profits for three consecutive years out of the first seven years of their operations, provided their annual turnover does not exceed ?25 crores during these financial years. This exemption helps startups manage their cash flow during the initial, crucial years.
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Exemption on Long-Term Capital Gains: Under Section 54EE of the Income Tax Act, eligible startups can avail of an exemption on long-term capital gains if these gains are invested in a fund notified by the Central Government within six months from the date of asset transfer. The investment is capped at ?50 lakhs, and the funds must remain invested for three years.
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Exemption from Tax on Investments above Fair Market Value: Startups are exempt from tax on investments that exceed the fair market value, provided these investments are made by resident angel investors, family members, or funds not registered as venture capital funds. Investments above fair market value made by incubators are also exempt.
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Tax Exemption on Long-Term Capital Gains for Individual/HUF Investment: Section 54GB allows individuals or Hindu Undivided Families (HUFs) to exempt tax on long-term capital gains if such gains are invested in eligible startups. This exemption applies if the proceeds are used to subscribe to 50% or more of the equity shares of the eligible startup and the shares are not sold within five years.
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Carry Forward and Set Off of Losses: Eligible startups can carry forward their losses even if there is a change in shareholding, provided all shareholders holding shares on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year.
Frequently Asked Questions (FAQs)
How to claim startup exemption in income tax?
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To claim a startup exemption in income tax, a startup must first obtain a certificate from the Inter-Ministerial Board (IMB) set up by the Department for Promotion of Industry and Internal Trade (DPIIT). Once recognized as an eligible startup, it can apply for a tax exemption under Section 80-IAC of the Income Tax Act, which allows a 100% tax exemption on profits for any three consecutive years out of the first ten years from its incorporation.
What is Section 79 exemption for startups?
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Section 79 of the Income Tax Act deals with the carry forward and set off of losses in the case of a change in shareholding. For eligible startups, Section 79 provides a relaxation where the startup can carry forward its losses even if there is a change in the shareholding pattern, provided all shareholders who held shares on the last day of the year in which the loss was incurred continue to hold shares on the last day of the year in which the loss is being carried forward.
Are startups exempted from GST?
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No, startups are not completely exempted from GST. However, startups with an annual turnover below ?20 lakhs (?10 lakhs for northeastern states) are not required to register for GST. Once a startup exceeds this turnover threshold, it must register for GST and comply with the applicable regulations.
What is the turnover limit for startup?
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To be considered an eligible startup under the Startup India initiative, the turnover of the entity should not exceed ?100 crores in any of the previous financial years since its incorporation. This limit allows startups to avail various benefits under the Startup India scheme, including tax exemptions.
What is the income tax rate for startups?
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Eligible startups that opt for the tax exemption under Section 80-IAC are exempt from paying income tax on profits for any three consecutive years out of the first ten years since incorporation. For other years, or if the startup is not eligible under Section 80-IAC, the standard income tax rates applicable to companies or LLPs would apply.
What is Section 56 exemption for startups?
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Section 56(2)(viib) of the Income Tax Act, also known as the "Angel Tax," is levied on the premium received by startups when issuing shares to investors. However, eligible startups recognized by DPIIT are exempt from this tax if they meet certain conditions. To avail this exemption, the startup must file a declaration with DPIIT and ensure that the investment received does not exceed ?25 crores, excluding specified investors.
Conclusion
Navigating the intricacies of the Startup India scheme and ensuring your startup meets the eligibility criteria can be challenging. ADCA, one of the leading chartered accountant firms in Bangalore, is here to help. We provide comprehensive solutions for GST, tax, accounting, and CFO services tailored to the needs of startups. To learn more about how ADCA can assist your startup in leveraging the full benefits of the Startup India program, visit ADCA.
