India’s vibrant startup ecosystem is actively supported by various government initiatives, including significant tax benefits aimed at easing the initial financial burden and encouraging innovation. For eligible startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT), understanding and correctly leveraging these tax incentives can provide a crucial competitive edge and free up valuable resources for growth.
What Makes a Startup Eligible?
To access most specific startup tax benefits, an entity (Private Limited Company, LLP, or Registered Partnership Firm) must first obtain recognition as a ‘Startup’ from the DPIIT. Key eligibility criteria generally include:
- Being incorporated/registered for less than 10 years.
- Annual turnover not exceeding INR 100 crore in any preceding financial year.
- Working towards innovation, development, or improvement of products/processes/services, or having a scalable business model with high potential for employment generation or wealth creation.
- Not formed by splitting up or reconstructing an existing business.
Key Tax Benefits for DPIIT-Recognized Startups:
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Income Tax Holiday (Section 80-IAC): This is perhaps the most attractive benefit. Eligible startups can claim a 100% tax deduction on profits for any three consecutive assessment years out of their first ten years of incorporation.
- Eligibility Conditions: Besides DPIIT recognition, the startup must be incorporated between April 1, 2016, and March 31, 2025 (extended date), and requires an additional certification from the Inter-Ministerial Board (IMB) specifically for claiming this benefit. Meeting turnover and innovation criteria is essential.
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Angel Tax Exemption (Section 56(2)(viib) Relief): As discussed previously, investments received by eligible DPIIT-recognized startups from residents, certain non-residents, and specified funds can be exempt from the Angel Tax, provided the aggregate investment amount doesn’t exceed INR 25 crore and certain other conditions are met. The startup needs to file Form 2 with DPIIT for this declaration. This provides significant relief when raising funds at a premium over fair market value.
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Capital Gains Tax Exemption for Investors (Section 54EE / 54GB - subject to conditions):
- Section 54EE: Allows exemption from long-term capital gains tax if proceeds are invested in specified government funds aimed at financing startups (subject to specific scheme notifications).
- Section 54GB: Provides exemption from long-term capital gains on the sale of a residential property if the net consideration is invested in the equity shares of an eligible startup (subject to numerous conditions regarding holding period, asset utilization by the startup, etc.).
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Relaxations for Carry Forward of Losses (Section 79): For eligible startups, the condition for carrying forward losses (requiring continuity of 51% shareholding) is relaxed. Losses can be carried forward and set off if all shareholders who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold those shares on the last day of the year in which the loss is set off, even if the 51% threshold isn’t met (provided the loss occurred within the first 7 years of incorporation).
Leveraging the Benefits:
Obtaining DPIIT recognition is the first crucial step. Subsequently, startups must carefully assess eligibility for each specific benefit (like the 80-IAC IMB certification) and ensure meticulous compliance with all associated conditions. Maintaining proper documentation and seeking expert tax advice is vital to successfully claim these benefits and avoid potential issues during assessments.
These tax incentives represent a significant government commitment to fostering the startup ecosystem. By understanding and utilizing them correctly, startups can strengthen their financial footing and focus on innovation and scaling their ventures. K S M G & CO provides specialized advisory to help startups navigate these provisions effectively.