Startup India: Eligibility, Tax Exemptions and Incentives
The Government of India launched the Startup India initiative to foster innovation, boost entrepreneurship, and support budding startups with various tax benefits and regulatory relaxations. If you're planning to register your business as a startup under this scheme, it’s important to understand the eligibility criteria, available tax exemptions, and government incentives.
This guide covers everything you need to know about Startup India eligibility, tax benefits, and incentives.
Eligibility Criteria for Startup India
To qualify as a recognized startup under the Startup India initiative, your business must meet the following conditions:
Type of Entity: Private Limited Company, Registered Partnership Firm, or LLP (Limited Liability Partnership)
Age of the Company: The entity must not be older than 10 years from the date of incorporation.
Annual Turnover: Should not exceed ₹100 crore in any of the previous financial years.
Original Entity: The company should not have been formed by splitting up or reconstructing an existing business.
Innovation/Scalability: The startup must be working towards innovation, development, improvement of products/services/processes, or have a scalable business model with potential for employment or wealth creation.
Once these criteria are met, the startup can apply for DPIIT recognition through the Startup India portal.
Tax Exemptions Available for Startups in India
To encourage innovation and entrepreneurship, the Indian government has introduced several tax benefits under the Startup India and Make in India initiatives. These tax exemptions help startups manage their finances better and focus on growth. Let’s explore the key exemptions available:
3-Year Income Tax Holiday
Startups incorporated between April 1, 2016, and March 31, 2022, can claim a 100% income tax exemption on profits for any three consecutive years within the first seven years of incorporation.
Condition: The startup’s annual turnover must not exceed ₹25 crore in any financial year.
This tax holiday helps startups reinvest profits during their early stages and ease cash flow challenges.
Exemption on Long-Term Capital Gains (Section 54EE)
Eligible startups can avoid paying tax on long-term capital gains if the amount is invested in funds notified by the central government within six months of the asset transfer.
- Maximum investment: ₹50 lakh
- Lock-in period: 3 years
Premature withdrawal of the investment will lead to the withdrawal of the exemption benefit.
No Tax on Investments Above Fair Market Value (FMV)
Startups are exempt from tax on investments received above FMV from:
- Angel investors
- Accredited incubators
- Non-VC registered funds or individuals
Capital Gains Exemption Under Section 54GB
If an individual or HUF sells a residential property and invests the proceeds in a startup (by purchasing 50% or more shares), they can get relief from long-term capital gains tax.
Condition: Shares should not be sold within 5 years
Startup must use the funds to acquire new assets and hold them for at least 5 years
Carry Forward of Losses (Section 79)
Startups can carry forward business losses provided:
The shareholders holding voting rights at the time the loss occurred continue to hold them on March 31 of the year when the loss is set off
Benefits of Startup India
The Startup India initiative offers a variety of benefits aimed at promoting the growth and success of startups in India. Some of the key benefits include:
Tax Exemption : Startups certified under the Startup India Scheme are eligible for three years of exemption from income tax, provided they fulfill certain conditions. This tax holiday helps startups allocate more resources to growth and innovation during the critical initial years.
Access to funding : The government has set up a Rs 10,000 crore fund to provide funding support to startups through selected venture capital firms. Additionally, startups can also access various government schemes and programs aimed at providing financial assistance and support.
Simplified Compliance : Startup India streamlines regulatory processes, enabling startups to self-certify compliance with labor and environmental laws, reducing administrative hassles.
Mentoring and Networking : Startup India facilitates mentorship programs and networking opportunities, connecting startups with experienced mentors, investors and industry experts to guide them in their journey.
Startup Certification : Startups certified under Startup India get official recognition, which provides several benefits including tax exemptions, easier compliance mechanisms and access to funding.
Government Procurement Preferences : Startups get preferential treatment in government procurement, opening doors to lucrative contracts and collaborations with government agencies.
Incubation Support : Startup incubators and accelerators supported by Startup India provide the necessary resources, infrastructure and mentorship to foster startup growth and innovation.
Documents required for the Startup India Scheme
List of documents commonly required for registration under Startup India Scheme:
PAN Card of the entity.
Proof of funding.
Details of directors/partners including name, address, contact information and educational qualifications.
Certificate of incorporation.
List of achievements, if any.
Website of entity.
For Private Limited Companies and LLPs, provide the authorisation letter.
