Learn about various tax laws and exemptions applicable for Your Startup in India
Eligibility for Startup India
As per the Startup India Action plan, the following conditions must be fulfilled in order to be eligible as Startup. The startup should not have 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 crores 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 and 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 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 If withdrawn before 3 years, then the exemption will be revoked in the year in which money is withdrawn.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 are 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 assets 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 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in the case of eligible startups.