Are Startups in India Eligible for Tax Benefits?

Narendra Kumar

06 Sep, 2022

The government of India with the primary objective of promoting the startups in India, has introduced the Startup India Scheme, an initiative taken by the Prime Minister Narendra Modi. The primary objective of the Startup India Scheme is –

• Promoting Bank financing;
• To simply the Incorporation process of startup;
• Granting various benefits and tax exemption.

What are the Eligible Startups in India?

Eligible startups are allowed to avail all the benefits and exemption in taxation. To be qualified as Eligible startups, it must fulfill the following conditions-

• Startups must be incorporated as a private company or limited liability partnership.
• It must be incorporated or registered in India for less than 7 years from the date of its incorporation.

• The annual turnover in any of the preceding financial year shall not exceed Rs 100 crore.
• The objective of the startups is to work towards development, innovation and, commercialization of new products/services.
• DIPP (Department of Policy and promotion) and Inter-Ministerial Board Approval is required.
• For funding through Incubation, Angel and private equity fund, it must have obtained a recommendation letter by an incubation.

Benefits of Startups in India

• Easy compliances and simpler form of handling the incorporation
• Easy and fast track exit for unsuccessful startups in India
• Various exemptions and tax benefits^[1] on Capital gain
• Funding facility by infusing more capital into the startup action plan
• Innovation and development of a new product market
• A Scalable Business model with high potential for the creation of wealth

Taxation Benefits for Startups

Startup company post getting incorporation can apply for tax exemption under section 80 IAC, Section 56 of the Income Tax Act. The startup can avail the benefits of tax for 3 Financial years out of its first 10 years since incorporation.

• Criteria for availing exemption under section 80 IAC

The startup must be Private limited company or Limited liability Partnership and have been incorporated after 1^ST April 2016 along with that the entity should be a recognized setup.

• 100% Tax Rebate

If the annual turnover exceeds 100 crores, the startup is eligible for 100% tax rebate on profits for a period of 3 years in a period of 7 years.

• Criteria for availing exemption under section 56 of the Income Tax Act

For availing the exemption under section 56, the entity should a DPIIT Recognized.

For availing the exemption under section 56, the entity should a DPIIT Recognized.

• Exemption under section 54EE

Exemption under section 54EE is available for the eligible Startupson long term capital gains, if LTCG is invested in a fund notified by central government within a time duration of 6 months from the date of transfer of asset.

• Investments above the FMV

The tax has been exempted by the government levied on the investment above the fair market value. Investments made by the resident angel investor or funds which are not registered in Venture capital fund is exempted.

Government Benefits to Startups

Government has provided various benefits to the eligible startups mentioned below –

• Venture Capital Scheme

This scheme helps in making investments in agribusiness projects through financial participation. Persons like farmers, Producers, partnership/ proprietorship, companies, Agripreneurs which avails the financial support for the preparation of DRR (Detailed Project reports) through product development authority.

• SIP-EIT (Support for International Patent Protection in Electronics and & Information Technology)

This scheme provide financial support to MSMEs and new technology setup for filing international patent which as a result encourages the innovation with the capturing growth opportunities in the ICTE SECTOR.

• Facilitation of Bank Loan

Through stand-up scheme, the government facilitate the bank loan between 10 lakhs to 1 crore to –

a. One schedule caste or

b. One schedule Tribe and 1 woman per bank branch for establishing greenfield enterprises.

• Risk Mitigation and High Reward Research

The government has started an initiative for supporting that are new and risky. The proposal if successful expected to have a high shift influence on Science technology. It is worked under Science and Research Board under the Department of Science and Technology.

• Registration with NSIC

Registration with NSIC under Single Point Registration Scheme for all MSME and UAM enterprises.

Conclusion

Government of India has taken an initiative by announcing the action plan that represents and addresses all the aspects of the Startups with the purpose to accelerate the growth of startups in a very simplified way. This initiative helps in funding and innovations. With the help of start-up India, it provides a platform to the stakeholders to interact amongst each other to form a successful partnership in a dynamic environment.

Also Read: Startup India Registration Process – The Complete Guide