Income Tax on Startup – The prime minister announced the “Startup Indian Campaign” in 2016 to provide a nurturing ecosystem for innovation, technology and entrepreneurship. The department for promotion of industry and internal Trade (DPIIT) formulated the startup scheme. In India, incorporation of startups is very easy due to the following key features of Goverment Startup action plan :
(i) Easy registration with lesser compliances.
(ii) Tax Holidays for a period of 3 consecutive years out of the block 10 initial years.
(iii) Exempted from previous experience/turnover in getting government tenders.
What is startups as per Income Tax?
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 10 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.
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Income Tax Rates applicable to Startups
| Type of Business Entity | Income Tax applicable |
| Proprietorship/ Individual | As per Income Tax Slab Rates |
| Partnership/ LLP Firm | 30% of Income |
| Indian Company | 25% of Income |
Tax exemptions allowed to Startups in India
Tax exemptions allowed to eligible startups are as follows :
1. 3 year tax holiday in a block of seven years
Start-ups will be eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years. Such deduction would be available upon filing an application with DPIIT provided that annual turnover does not exceed Rs.25 crores in any financial year.
2. Exemption from tax on Long-term capital gains
Under section 54EE, startups are exempt from 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.
However, 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.
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3. 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. Upon filing the requisite declaration with DPIIT and subject to certain conditions, Eligible start-ups are exempted from Angel tax.
4. Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups u/s 54GB.
The 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 and also if invested in eligible start-ups.
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.
However, 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.
5. 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 for 7 years (10 years from FY 2023-24). However, the restriction of holding of 51 per cent of voting rights u/s 79 has been relaxed in the case of eligible startups is not applicable from FY 2023-24.
Pre-requisites to claim exemption under Income Tax for Startup
All eligible start-ups who intent to claim the benefits of such tax incentives would be required to:-
- Maintain Separate Books of Accounts for Eligible Business
- Get their Accounts audited by a Chartered Accountant
- Furnish Audit Report in Form 10CCB along with ITR.
