Funding your dreams: Startup Registration Tax Benefits

The Government of India launched the Startup India campaign in 2016 with the aim of increasing entrepreneurship in the country. As part of this initiative, the government has introduced many incentives and tax exemptions for startups in India. This article covers the various Startup Registration Tax Benefits available in India.

What is a Startup?

A startup is a new business formed with the goal of selling a single product or service that the founders believe is in demand. To receive taxation and other government benefits, a startup must meet the following conditions:

• The company should not have existed for more than 10 years. Simply put, the company must be less than 10 years old from the date of incorporation/registration. 
• The company must be registered as a limited company, limited partnership or partnership to receive initial support.
• Annual turnover for the year after its establishment should not exceed INR 100 crores.
• The startup must be committed to the work of developing and updating products and services. 
• The company cannot be created through restructuring or dividing an existing company.

What are the Startup Registration Tax Benefits?

Indian government has announced various tax exemptions for startups in India to promote the Startup India program and the Make in India program.

Startups are given various exemptions such as:

• 3 year Tax holiday
  • Startup registered or incorporated between April 1, 2016, and 31st March 2022 is eligible to claim this benefit. Such startups can get a 100% tax exemption on their profit for 3 years in a block of 7 years. However, the total turnover of the company in the financial year cannot exceed 25 million. Cash shortage is one of the most difficult aspects of running a startup. A tax holiday for three consecutive years helps startups set up their companies without major problems.
• Long-term capital gains exemption
  • The government has introduced a new exemption from long-term capital gains under section 54EE. This section states that all eligible startup companies can claim long-term capital gains tax exemption if the profits are invested in a fund designated by the government within six months of the transition date. The maximum amount of the investment is limited to 50,000,000 euros and it must be kept in the fund for 3 years. If the money is withdrawn before 3 years have passed, the exemption will be cancelled.
• Exception for investments exceeding FMV
  • The tax on investments exceeding the fair market value is exempt from the startup tax. These investments include investments from angel investors, investments from incubators, and investments from funds and individuals that are not registered as venture capital funds. Simply put, investments made by angel investors paying more than the fair value of the company are tax-free. It helps startups get more money to run their operations.
• Exemption under section 54GB
  • According to Section 54GB of the Income Tax Act, if an individual/HUF sells a residential property and uses the proceeds to invest in SMEs or buy at least 50% stake in eligible start-ups, he is exempted from paying long-term capital gains. However, the exemption is possible only if the shares are not sold within 5 years from the date of acquisition. Startups must also use the invested funds to purchase assets and may not sell or transfer assets within five years of purchase.
• Start-up of allowable carry-forward losses
  • According to Section 79 of the Income Tax Act, a company can carry forward its losses if shareholders who had voting rights in the year of the loss will own shares on March 31 of the year of this transfer and the loss occurred within 7 years of the incorporation of the company.

Conclusion

In conclusion, the Startup India campaign, initiated by the Government of India in 2016, has significantly bolstered entrepreneurship by providing various tax benefits and exemptions to qualifying startups. These incentives, including a three-year tax holiday, exemptions for long-term capital gains, and allowances for carry-forward losses, contribute to a conducive environment for startups to thrive and innovate. The Startup Registration tax benefits not only foster financial growth but also encourage the development of new businesses, fueling India’s entrepreneurial landscape.

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