Apr 14,2020 | 18 min read

Tax Saving Options For Startups

Author - Debanshu Khettry


India is in the top leading countries in the world who have counted for startups. As the Indian market is constantly evolving India requires more entrepreneurs. Indians were not very comfortable with taking charge. However, the equation has changed dramatically in recent years. The growth of entrepreneurs is continuously increasing with the new innovative ideas. Few of them capture the international market as well. The Government of India has launched a scheme called Startup India to help, support and promote the growth of young startups. The plan behind introducing Startup India is to help the startups as meander throughout the entire process of setting up a business.  

What Is Startup India?

Startup India is an initiative taken by the Government of India which is launched in 2016. It is a drive taken to boost and improvise startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship in India. The main objective of the Startup India is to support startups as well as make India as a country of job creators rather than job seekers.

The Government of India has announced the action plan which addresses all the perspectives of the startup ecosystem and accelerates the startup movement. The action plan included:

  • Enhanced infrastructure
  • Easier Intellectual Property Rights (IPR) facilitation
  • A better administrative environment such as tax benefits, improved of setting up a company, easier compliance, faster exit mechanisms, etc.
  • A financial stimulus in the form of fund of Rs 10,000 crore managed by SIDBI for increasing funding opportunities
  • Startup India Portal offers a wide range of useful resources and networking database for entrepreneurs in the Startup ecosystem­

Eligibility To Be Part Of Startup India

There are some eligibility criteria to become part of Startup India. Let's have a look:

  • Company incorporation should be within 7 years. For biotechnology, the period extends up to 10 years.
  • The annual turnover of a company should be up to 25 crores, it should not cross 25 crores.
  • The main objective of a company should be towards development, innovation, deployment and commercialization of new products or services or processes. And that to be driven by either technology or intellectual property.
  • A company should be new and cannot be created by splitting up from an existing company.
  • A company should be received a certificate from the Inter-Ministerial Board setup
  • A company can be registered a Limited Liability Partnership (LLP), Registered Partnership or a Private Limited Company.

Tax Exemptions Under Startup India

A company which passed the eligibility criteria can enjoy the benefits of tax exemptions. The Government planned these exemptions to boost the general investments made in startups which further help to promote their expansion and growth. The provisions are detailed as follows:

  1. 3 year tax holiday in a block of 7 years - A startup company incorporated after 1st April 2016 is eligible to get a 100% tax rebate on profit. It can be claimed for 3 years in the block of 7 years. A condition applied to claim of this benefit is that the annual turnover of the company should not exceed 25 Crores. This tax exemption benefit has been provided to help the startups in their capital management while setting up the business.
  2. Exemption from tax on long-term capital gains - A new section Section 54 EE has been added in the Income Tax Act which states that startups are exempted from long term capital gains tax. This is applicable only if capital gains which have been invested in are a part of the fund notified by the Central Government of India within a period of 6 months commencing from the date of transfer of the asset. The maximum amount of Rs. 50 Lacs can be invested for long term gains. The amount has to be funded for 3 years minimum. If the investor withdraws before that the exemption becomes invalid and the amount becomes taxable.
  3. Tax exemptions on investments above the fair market value - The Government give an exemption of tax on the investment above the fair market value when a startup invests in an investment. This includes various types of investments such as funding secured by resident angel investors and funds which are not registered as venture capital. The investments made by incubators above market value are also exempted.
  4. Tax exemptions to individual/HUF on long-term capital gains from equity shares - As explained in the Section 54GB of Income Tax Act, the tax exemption has been provided on long term capital gains on the sale of the property, provided these gains further should be invested in enterprises. As mentioned in the Micro, Small and Medium Enterprises (MSME) Act, 2006 these enterprises should be small or medium. If an individual/HUF has sold their property and funded the amount in an existing startup company then the amount has become tax exempted. However, the shares cannot sell or transfer for a minimum of 5 years and startups have to use the financed amount to purchase assets. Moreover, startups cannot also transfer the bought assets for 5 years minimum.

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Debanshu Khettry

Debanshu Khettry is a fourth generation lawyer. At his firm, Leslie & Khettry, he focusses on corporate law, commercial contracts, corporate finance and banking law, securities law, property law, and legal due diligence.