Startup India: Eligibility, Tax Exemptions and Incentives

Prime Minister Narendra Modi proclaimed the Startup India campaign in 2016 to boost entrepreneurship in India. The action plan aimed at promoting bank financing for startups, simplifying the incorporation of the startup process and grant of various tax exemptions and other benefits to startups.

But all the benefits and exemptions are available to the startups only if they come under the criteria of an ‘Eligible Startup’.

So first let’s understand the conditions to be met to qualify as an “Eligible Startup”.

Latest Update

Budget 2021 update: 
The tax holiday for startups has been extended by one more year up to 31st March 2022.

Eligibility for Startup India

As per the Startup India Action plan, the followings conditions must be fulfilled in order to be eligible as Startup :

• Has not yet completed a period of ten years from the date of incorporation/registration.
• Is a private limited company or registered as a partnership firm or a limited liability partnership.
• Has an annual turnover not exceeding Rs. 100 crore for any of the financial years since incorporation/registration.
• Is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
• It is not formed by splitting up or reconstructing a business already in existence.

Tax exemptions allowed to Eligible Startups under Startup India Program

Following  tax exemptions have been allowed to eligible startups :

3 year tax holiday in a block of seven years

The Startup incorporated between April 1, 2016, till 31st March 2021 were eligible for this scheme. Budget 2021 has extended the eligibility to 31st March 2022. Such startups will be eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years provided that annual turnover does not exceed Rs.25 crores in any financial year. This will help the startups to meet their working capital requirements during their initial years of operation.

Exemption from tax on Long-term capital gains

A new section 54 EE has been inserted in the Income Tax Act for the eligible startups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by the Central Government within a period of six months from the date of transfer of the asset.

The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall be remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then the exemption will be revoked in the year in which money is withdrawn.

Tax exemption on investments above the fair market value

The government has exempted the tax being levied on investments above the fair market value in eligible startups. Such investments include investments made by resident angel investors, family or funds which are not registered as venture capital funds. Also, the investments made by incubators above fair market value is exempt.

Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups u/s 54GB.

The existing provisions u/s 54GB allows the exemption from tax on long-term capital gains on the sale of a residential property if such gains are invested in the small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act, 2006. But now this section has been amended to include exemption on capital gains invested in eligible start-ups also.

Thus, if an individual or HUF sells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition.

The startups shall also use the amount invested to purchase assets and should not transfer asset purchased within 5 years from the date of its purchase.

This exemption will boost the investment in eligible startups and will promote their growth and expansion.

Set off of carry forward losses and capital gains allowed in case of a change in Shareholding pattern.

The carry forward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power 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 in which such loss is to be carried forward. The restriction of holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in the case of eligible startups.

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