To boost up the start-up ecosystem in India, the government has introduced special tax incentives for start-ups over the years. These start-up tax deductions are for enterprises which qualify as “eligible start-ups”.
Eligible start-ups must be incorporated either as a private limited company, or as a partnership firm, or a limited liability partnership with a turnover of less than INR 100 Crores in previous fiscal years. An entity is considered to be a start-up only until 10 years from the date of its incorporation. Additionally, the start-up should be attempting to innovate or improve current goods, services, and procedures, and it should have the potential to produce money and jobs. It is mandatory for the "Start-up" to not be a company created through the division or reconstitution of an existing business.
Tax benefits for start-ups:
Following Tax benefits have been given to startups:
Income tax exemption for a period of 3 consecutive years:
Start-ups that were founded between April 1, 2016, and March 31, 2022, meet the requirements to be approved for a three-year tax exemption under Section 80 of the Income Tax Act. After receiving approval for tax exemption, a start-up may take advantage of this start-up tax deduction for three consecutive fiscal years during the first 10 years following incorporation. If their annual turnover does not exceed Rs. 25 crores in any financial year, these entrepreneurs will be qualified for a three-year, 100% tax exemption on profit during a block of seven years. This tax exemption is aimed to lead the firm better-off to cover their initial working capital needs.
Tax Exemption under Section 56 of the Income Tax Act (Angel Tax)
If a start-up has received DPIIT recognition and its total paid-up share capital and share premium after issuing or proposing to issue shares is less than INR 25 crores, it is eligible for an exemption from the angel tax. Angel tax is imposed on the funds raised by unlisted companies through the issuance of shares from an Indian investor, if the share price of the issued shares exceeds the company's fair market value. The excess realisation is regarded as income and subject to the appropriate taxes. Only investments made by a resident investor are subject to the angel tax. The tax imposed on investments in qualified start-ups that exceed fair market value has been waived by the government. This tax holiday is valid on investments made by resident angel investors, family or funds which are not registered as venture capital funds.
Tax exemption on capital gains
Start-ups are exempted from paying taxes under Section 54EE of the Income Tax Act. The tax on long-term capital gains is connected to this exemption. If a long-term capital gain, or a portion thereof, is invested in a fund that has been approved by the Central Government within six months of the asset transfer date, start-ups are excluded from paying tax on that gain. Amounts up to Rs. 50 lakhs can be invested in the long-term defined asset. For a period of three years, this sum must stay invested in the designated fund. This start-up taxation exemption will be terminated in the year that the money is withdrawn if it is withdrawn prior to 3 years.
Tax exemption to individual/HUF on investment of long-term capital gain in equity shares of eligible start-ups
The government permits a tax exemption under Section 54GB of the Income Tax Act with regard to the tax on long-term capital gains from the sale of any residential property, provided that such gains are invested in any MSME enterprise, as well as eligible start-ups. Therefore, tax on long-term capital will be exempted in any situation where an individual or HUF sells a residential property and invests the capital gains to purchase 50% or more of the equity shares of the eligible start-ups, provided that such shares are not sold or transferred within 5 years of the date of their acquisition. Therefore, tax on long-term capital will be exempted if an individual or HUF sells a residential property and invests the capital gains to purchase 50% or more of the equity shares of the eligible start-ups, if such shares are not sold or transferred within 5 years of the date of their acquisition. The start-ups are expected to use the funds invested to buy assets; however, they must not transfer such assets within five years of the asset's purchase date.
Set off of carry forward losses and capital gains allowed in case of a change in Shareholding pattern
Start-ups whose shareholders have held their shares from the last day of the year in which the loss was incurred to the last day of the previous year in which such loss is to be carried forward are eligible for the set off and carry forward of losses. If all of the shareholders of the firm who had voting shares on the last day of the year in which the loss was incurred continue to own shares on the last day of the previous year in which such loss is to be carried forward, then losses incurred by eligible start-ups may be carried forward.
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