Tax Benefits for Recognized Startups under Startup India
August 30, 2024
Startup India Eligibility Criteria
To qualify as a startup under the Startup India initiative, the following criteria must be met:
- The company must be within ten years of its incorporation or registration.
- It should be structured as a private limited company, partnership firm, or limited liability partnership.
- The annual revenue should not exceed Rs. 100 crore in any financial year since its inception.
- The startup must focus on innovation, development, or improvement of products, processes, or services, or operate a scalable business model with strong potential for job creation or wealth generation.
- It should not be formed by splitting up or reorganizing an existing business.
Tax Benefits for Recognized Startups under Startup India
Recognized startups under the Startup India program are entitled to several tax benefits:
Tax Holiday for Three Years within a Seven-Year Window: Startups incorporated between April 1, 2016, and March 31, 2021, were originally eligible for a tax holiday, which was extended to March 31, 2022, by the 2021 Budget. These startups can claim a 100% tax exemption on profits for any three consecutive years within a block of seven years, provided their annual turnover does not exceed Rs. 25 crore in any given financial year. This exemption is intended to help startups manage their working capital in their formative years.
Exemption on Long-Term Capital Gains: Section 54EE of the Income Tax Act offers tax exemption on long-term capital gains for eligible startups if these gains, or part of them, are reinvested in a government-notified fund within six months of the asset sale. The maximum investment allowed in the specified asset is Rs. 50 lakh, and the investment must remain in the fund for at least three years. Early withdrawal will result in the exemption being revoked for the year of withdrawal.
Exemption on Investments Above Fair Market Value: Eligible startups are exempt from taxes on investments that exceed the fair market value. This includes investments from resident angel investors, family members, or funds not registered as venture capital funds. Incubator investments above fair market value are also exempt from this tax.
Capital Gains Tax Exemption for Individuals/HUFs under Section 54GB: Section 54GB of the Income Tax Act has been amended to extend tax exemption on long-term capital gains from the sale of residential property, provided these gains are reinvested in the equity shares of eligible startups. To qualify, individuals or Hindu Undivided Families (HUFs) must invest in 50% or more of the startup’s equity shares, and these shares must not be sold or transferred within five years. The startup must also use the invested funds to acquire assets, which should not be sold within five years of purchase.
Set-Off and Carry Forward of Losses Despite Changes in Shareholding: Eligible startups can carry forward and set off losses even if there is a change in the shareholding pattern. The usual requirement of maintaining 51% of voting rights under Section 79 is relaxed, provided that all shareholders holding voting power at the end of the year in which the loss was incurred continue to hold their shares at the end of the previous year in which the loss is carried forward.
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