Major Tax Exemptions to Startups

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

  • Being incorporated or registered in India for less than seven years and for biotechnology startups up to 10 years from its date of incorporation
  • Annual turnover not exceeding Rs 25 crores in any of the preceding financial years.
  • Aims to work towards innovation, development, deployment or commercialization of new products, processes or services driven by technology or intellectual property.
  • It is not formed by splitting up or reconstruction of a business already in existence
  • It must obtain certification from the Inter-Ministerial Board setup for such a purpose.
  • It can be incorporated as a private limited company, registered partnership firm or a limited liability partnership.

Under Startup India Initiative recognized startups have been exempted under several sections of IT Act.

1. Income Tax Exemption on profits under Section 80-IAC of Income Tax (IT) Act.

The Inter-Ministerial Board of Certification is a Board set up by Department for Promotion of Industry and Internal Trade (DPIIT) which validates Startups for granting tax related benefits. A DPIIT recognized Startup is eligible to apply to the Inter-Ministerial Board for full deduction on the profits and gains from business (exemption under Section 80IAC of the Income Tax Act) provided the following conditions are fulfilled. The entity should be A private limited company or a limited liability partnership, Incorporated on or after 1st April 2016 but before 1st April 2021, and Products or services or processes are undifferentiated, have potential for commercialization and have significant incremental value for customers or workflow The deduction is for any three consecutive years out of seven years from the year of incorporation of start-up.

Till date, 38 Inter-Ministerial Board meetings have taken place and 247 startups have been granted exemption under Section 80IAC of the IT Act

2. Tax Exemption on Investments above Fair Market Value

DPIIT Recognized Startups are exempt from tax under Section 56(2)(viib) of the Income Tax Act when such a Startup receives any consideration for issue of shares which exceeds the Fair Market Value of such shares.

The startup has to file a duly signed declaration in Form 2 to DPIIT {as per notification G.S.R. 127 (E)} to claim the exemption from the provisions of Section 56(2)(viib) of the Income Tax Act. With regard to declarations received from entities, furnished in Form 2, intimation regarding receipt of Declaration in Form 2 has been mailed in the cases of 1,729 entities as on 4 of December 2019.

3. Introduction of Section 54EE in the Income Tax Act, 1961

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 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 exemption will be revoked in the year in which money is withdrawn.

4. Amendment in Section 54GB of the Income-tax Act

Exemption from tax on capital gains arising out of sale of residential house or a residential plot of land if the amount of net consideration is invested in prescribed stake of equity shares of eligible Startup for utilizing the same for purchase of specified asset

  • The condition of minimum holding of 50% of share capital or voting rights in the startup relaxed to 25%
  • The period of extension of capital gains arising from for sale of residential property for investment in start-ups has been extended up to 31 March 2021.

5. Amendment in Section 79 of Income Tax Act

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 previous year in which such loss is to be carry forward.The restriction of holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in case of eligible startups.

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Disclaimer:"The information contained herein is only for informational purpose and should not be considered for any particular instance or individual or entity. We have obtained information from publicly available sources, there can be no guarantee that such information is accurate as of the date it is received or it will continue to be accurate in future. No one should act on such information without obtaining professional advice after thorough examination of particular situation."