How do Startups get Tax Exempt?

Eligibility For Startup India

In 2016, the Indian Government announced the Startup India campaign to improve the entrepreneurship spirit in India. The campaign aimed to promote bank financing, simplifying the process of incorporation of the startups and grant Startup tax exemption. The tax exemptions and benefits are available to startups only if they fulfill the criteria for an ‘Eligible Startup’. Startup tax exemption is given by the Government to boost entrepreneurship in India.

To claim startup tax exemption, the startup must be eligible. Following conditions must be fulfilled to be eligible as a startup as per the Startup India Action Plan:

• The startup must be incorporated or registered in India for less than 7 years and for biotechnology startups up to 10 years from its date of incorporation to get startup tax exemption. 
• The annual turnover of the startup should not exceed Rs 25 crores in any of the preceding financial years to get startup tax exemption. 
• The startup must aim to work towards innovation, growth, arrangement, or commercialization of new products, processes, or services driven by technology or intellectual property to get startup tax exemption. 
• The startup should not be formed by splitting up or reconstructing a business already in existence to get a startup tax exemption. 
• The startup must obtain certification from the Inter-Ministerial Board set up for this purpose to get startup tax exemption.
• The startup may be incorporated as a private limited company, registered partnership firm, or a limited liability partnership to get startup tax exemption. 
  

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The startup tax exemption can be claimed in the following ways: 

Tax holiday for three years in a block of seven years

The Startups that are incorporated after April 1, 2016, are eligible for receiving 100% tax rebate on profit for a period of three years in a block of seven years if the annual turnover of the startup does not surpass Rs 25 crores in any financial year. This will benefit the startups to meet their working capital wants during their initial years of operation. This is how startup tax exemption can be claimed. 

Startup tax exemption on Long-term capital gains

The startup tax exemption is given to only startups who are eligible to get exemption on their tax on a long-term capital gain if such a long-term capital gain or a part of it is invested in a fund as notified by the Central Government from the date of transfer of asset within a period of six months. The extreme amount that can be invested in the long-term specified asset is Rs 50 lakh. The said amount shall remain invested in the specific fund for a period of three years and if it is withdrawn before three years, the exemption will be revoked. Startup tax exemption can be claimed in this way. 

Startup tax exemption on investments above the fair market value

The Government provides for Startup tax exemption only to eligible startups. The tax is charged on investments above the fair value. These investments include investments made by resident investors, families, or funds that are unregistered as venture capital funds. The investment that is above the fair market value and is made by incubators are exempt. This is one of the ways in which startup tax exemption can be claimed. 

Startup tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups

The tax exemption is given on long-term capital gains on the sale of a residential property only if the gains are invested in small or medium enterprises. This section was amended to include exemptions on capital gains in eligible startups too. 

If an individual or a Hindu undivided family sells a residential property and invests the capital gains to subscribe to the 50% or more equity share of the startups, then tax exemption will be given if the shares are not sold or transferred within 5 years of its acquisition. The amount invested is used by startups to purchase assets and they should not transfer the assets purchased within five years from the date of purchase. 

The startup tax exemption will boost the investment in eligible startups and will encourage their development and growth. This is one of the ways in which startup tax exemption can be claimed. 

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In shareholding pattern, set off of carrying forward losses and capital gains is allowed.

The losses that are carryforward with respect to startups are allowed if the shareholders of such companies who held the shares are having voting rights on the last day of the year in which losses have been incurred and they continue to hold the shares to the year in which the losses are carryforward. The restriction of holding only 51% of the voting rights has been relaxed in the case of eligible startups. 

DIPP Registration

The startups’ registration process was made flexible and easy in 2016 by the Government by coming up with DIPP registration (Department of Industrial Policy and Promotion).

Conclusion

Given above are the ways in which startups get exemptions from tax. These ways are not conclusive. Startup tax exemption is provided by the Government to maintain the entrepreneurship spirit in India. In order to get the exemption, getting expert advice is important. The correct legal advice for the startups to get tax exemption makes it easier to claim exemption and get all the required documents. Therefore, one must get legal advice while claiming tax exemption for startups as it saves time for a person. 

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Frequently Asked Questions How do Startups get Tax Exempt

Q1. What is Startup India and when was it launched?

Ans1. Startup India is a flagship initiative launched by the Government of India in January 2016 to promote innovation, entrepreneurship, and economic growth by providing support, tax exemptions, and simplified regulatory compliance to eligible startups.

Q2. Who is eligible for Startup India tax exemptions?

Ans2. Startups incorporated in India within the last 7 years (10 years for biotech startups), with an annual turnover not exceeding Rs 25 crore, working on innovation or technology-driven solutions, and certified by the Inter-Ministerial Board are eligible for tax exemptions under Startup India.

Q3. What is the age limit of a company to qualify for Startup India benefits?

Ans3. To qualify as an eligible startup, the company must be incorporated for less than 7 years. However, for biotechnology startups, the period is extended to 10 years from the date of incorporation.

Q4. What tax benefits are available to startups under the Startup India scheme?

Ans4. Eligible startups can avail of a 100% income tax rebate on profits for 3 out of 7 years, exemptions on long-term capital gains, and relief on investments above fair market value under the Startup India scheme.

Q5. How can a startup claim a tax holiday under Startup India?

Ans5. Startups incorporated after April 1, 2016, can claim a 100% tax holiday for 3 consecutive years in a block of 7 years, provided their annual turnover does not exceed Rs 25 crore in any financial year.

Q6. What is the capital gains exemption under Startup India?

Ans6. Startups can claim exemption from long-term capital gains tax if the gains are invested in a government-notified fund within 6 months of asset transfer. The investment must be held for at least 3 years to retain the exemption.

Q7. Can individuals get tax exemptions by investing in startups?

Ans7. Yes, individuals or Hindu Undivided Families (HUFs) who sell residential property and invest capital gains in eligible startup equity (minimum 50% stake) can claim exemption if the shares and assets are held for 5 years.

Q8. Is DIPP registration mandatory for startup tax exemption?

Ans8. Yes, DIPP (now DPIIT) registration is required for startups to be recognized and to claim tax benefits under Startup India. It simplifies compliance and allows access to government schemes and exemptions.

Q9. Do startups get relief from angel tax under Startup India?

Ans9. Yes, eligible startups are exempt from angel tax on investments above the fair market value if the investment comes from approved sources such as incubators or specified investors.

Q10. Can a startup carry forward losses even with changes in shareholding?

Ans10. Yes, eligible startups are allowed to carry forward and set off losses even if the 51% shareholding condition is not met, provided original shareholders with voting rights continue to hold shares at the end of each year.