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Tax Exemptions and Incentives for the Startups

The Startup India campaign aims to promote bank financing, simplifying the process of incorporation of the startups and grant Startup tax exemption and incentives to startups. The tax exemptions and benefits are available to startups only if they fulfill the criteria for an ‘Eligible Startup’. The main idea behind Startup tax exemption the Government is to boost entrepreneurship in India.

The following  tax exemptions have been allowed to an eligible start-up recognised by the DPIIT:

Deductions under Section 80-IAC :

Startup may apply for Tax exemption under section 80 IAC of the Income Tax Act. The provisions of the section 80 IAC of the Income Tax Act inter alia, provide for a deduction of an amount equal to 100 percent of the profits and gains derived from an eligible business by an eligible start-up for 3 consecutive assessment years out of 10 years, beginning from the year of incorporation, at the option of the startup subject to the condition that:

  • It is incorporated on or after the 1st day of April, 2016 but before the 1st day of April, 2024;
  • The total turnover of its business does not exceed one hundred crore rupees in the previous year relevant to the assessment year for which deduction under sub-section (1) is claimed; and
  • It holds a certificate of eligible business from the Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government.

Tax Exemption under Section 56 (Angel Tax):

Post getting recognition a Startup may apply for Angel Tax Exemption. Angel tax is the tax charged on the closely held company when it issues shares to a resident person at a price which is more than its fair market value. A start-up shall be eligible for claiming exemption from levy of angel tax under section 56(2)(viib) if following conditions are satisfied:

  • The entity should be a recognized Start-up;
  • Aggregate amount of paid up share capital and share premium of the Start-up after the proposed issue of share, if any, does not exceed INR 25 Crore.

Liberalised Regime of Section 79 to Carry Forward and Set off the losses of Startup:

Section 79 restricts carry-forward and set-off of losses in case of closely held companies in the event of change in shareholding and beneficial ownership beyond 51%. However, a relaxation is available in case of start-ups which provides that business losses can be carried forward and set off on satisfaction of either of the following conditions:

  • Continuity of 51% beneficial shareholding or voting power
  • Continuity of 100% of original shareholders

The above relaxation is currently available only for losses for the first seven years from the year of incorporation.

However, in order to align with the profit linked deduction which is available to start-up for three years out a window of the first ten years of incorporation, the relaxation with respect to carry-forward and set-off of losses is also proposed to be increased from a period of seven years to ten years.

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Note: This Post was last updated on December 6, 2023

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