Tax Incentives & Exemptions to Startups in India [2019]

The Startup India campaign was launched in 2016 in order to increase entrepreneurship in the country. Through this campaign, various aspects of running a startup, such as a bank financing, tax incentives, simplifying the process of registering the business and other benefits were targeted, in order to make running a business more appealing to India’s youth. 

Under the start-up India initiative, eligible businesses will have to get recognised as Startups by Department for Promotion of Industry and Internal Trade (DPIIT) to enjoy tax benefits, easier compliance and much more.

In this article, we will discuss the various tax incentives and exemptions that are applicable to the startups in India under this plan, as of 2019.

Eligibility to be part of Startup India

New businesses must meet the following conditions to be considered eligible for DPIIT startup recognition:

• A company that has been incorporated for less than 10 years qualifies as a startup. 
• The annual turnover of these companies should not be more than Rs 100 crores for any of the financial years since its incorporation
• The company should basically aim towards development, innovation, deployment, or commercialization of any new products, services, or processes that are either driven by technology or intellectual property
• The company cannot be created by splitting up an existing company to make a new one
• The company can be registered as either a limited liability partnership, registered partnership or a private limited company

Related Read: GST Rules And Benefits For Startups In India

Tax exemptions under Startup India

Under the Startup India program, eligible businesses can enjoy the following tax incentives and exemptions:

3 year tax holiday in a block of 7 years

Under section 80IAC, any startup that has been incorporated after 1 April 2016 can get a 100% tax rebate on its profits for a total period of 3 years within a block of 10 years. However, if the company’s annual turnover exceeds Rs 100 crore, then the tax rebate is not valid. Only private limited companies or LLPs are eligible for tax exemption under this section. Also, the company should be a DPIIT recognised startup.

This tax exemption has been put in place to help businesses meet their capital requirements while setting up. 

Exemption from tax on long-term capital gains

To make things easier for startups, a brand new section known as Section 54EE has been added to the Income Tax Act. Under this section, startups are exempt from long-term capital gains tax. However, this is only applicable if the capital gains that have been invested in are a part of the fund notified by the Central Government within a total period of 6 months from the date of the actual transfer of the asset.

Additionally, under this rule, the maximum amount of capital that a company can invest in the long-term specified asset is Rs 50 lakhs. The amount then has to be invested in the fund for at least 3 years. If the investor ends up withdrawing the amount before the 3 years are up, then the amount becomes taxable. 

Tax exemptions on investments above the fair market value

If an eligible startup makes an investment, the government will exempt the tax on the investment above the fair market value. This includes a range of different investments such as funding secured by resident angel investors and funds that are not registered as venture capital ones. Additionally, investments that are made by incubators above the fair market value are also exempt under this plan.

Tax exemptions to individual/HUF on long-term capital gains from equity shares

There is already an existing provision known as Section 54GB under which there are tax exemptions on any long-term capital gains on the sale of property only if these gains are further invested into enterprises. These enterprises must be small or medium ones, as defined under the Micro, Small and Medium Enterprises Act of 2006.

This provision has now been amended in order to include eligible startups into the mix. As a result of this, if an individual or a HUF decides to sell their property and then invests the money they get from the sale to subscribe to a minimum of 50% or more of an existing startup, then they are exempted from tax on these long-term capital gains. However, this is only applicable as long as the shares are not sold again within 5 years or even transferred to someone else.

Additionally, the startups have to use the amount that has been invested in order to purchase assets. They should not transfer the purchased asset to someone else for at least 5 years. 

The advantage of these tax incentives and exemptions is that they will boost the general investments made in startups, which will then promote their expansion and growth.

Also read: Income Tax Rules for Startups