Tax Benefits for Startups in India

India offers a range of attractive tax benefits to encourage and support startups. These benefits can significantly reduce financial burdens and help startups focus on growth and innovation. From the initial three years of complete tax exemption to the 20% tax benefit on capital gains and the tax-free status of ‘angel investments,’ these incentives play a vital role in facilitating emerging businesses’ financial stability and growth.

Tax-saving tips are popular among everyone because nobody wants to miss out on enjoying tax benefits that are legally permissible. This is true for entrepreneurs as well. Which businessman would not like to save money when paying taxes? The government always strives to provide tax benefits to entrepreneurs, especially start-ups, because they can significantly contribute to the economy of India. If you own a company in India, knowing income tax-saving tips will help you plan your budget more accurately.

What are Startups?

A startup is a young company founded on a unique idea that addresses a specific market problem or needs. They often operate in emerging fields or with innovative business models, aiming for rapid growth and disruption in their respective industries. Here are some key characteristics of startups:

• Innovation and Disruption: They challenge the status quo with new solutions and technologies, aiming to significantly alter existing markets or create entirely new ones.
• High Growth Potential: Startups operate with the ambition to scale rapidly, acquiring large customer bases and achieving significant market share in a short period.
• Uncertainty and Risk: Due to their innovative nature and untested models, startups often face high levels of uncertainty and risk. They may struggle with funding, competition, and adapting to rapid growth.
• Agility and Adaptability: To navigate the uncertainties, startups must be agile and adaptable. They quickly pivot their strategies, experiment with new ideas, and adjust to changing market conditions.
• Team and Passion: Driven by passionate founders and talented teams, startups often prioritize creativity, collaboration, and a willingness to learn and adapt.

Tax Exemption for Startups in India

There are multiple tax exemptions for startups. Here are the ones that can help you save on taxes:

No tax for the first three years

The Government of India offers 100% tax exemption to start-ups for the first three years. This gives new entrepreneurs time to build a business with an added budget, which they otherwise would have to pay as taxes. However, only companies registered with the Department of Industrial Policy and Promotion (DIPP) can claim this benefit. Moreover, the start-up has to be a company that works in the field of intellectual property and pushes innovation and development of services and products related to the same. The only tax the start-up has to pay is the Minimum Alternate Tax (MAT), which is calculated on the revenue reflected on the ‘book profit’ of the company.

20% tax exemption on capital gain

If you are an entrepreneur wondering how to reduce tax in India, you will be relieved to know that the government offers benefits on capital gain tax. The capital gain tax is the income tax companies pay on the profits earned from company stocks. Even though the earnings from stocks, shares, and bonds are taxable, start-ups get a tax benefit of 20% on the capital gain.

No tax on ‘Angel Investment’

A start-up often fails to earn the trust of new investors as they have no track record, which makes it harder for them to raise funds. Without significant investments, new entrepreneurs cannot continue to develop their business. Angel investors can help them in such a scenario. They negotiate the terms and interests payable by the entrepreneurs. The Government of India has announced that ‘angel investments’ are tax-free. Hence, start-ups can now collect the funds they require from angel investors without worrying about added taxation. If you are thinking of saving tax in a partnership firm more effectively and using the investment towards further company development, you must keep this point in mind.

Presumptive tax benefit

A start-up with a turnover of under ₹2 crore is eligible to enjoy the benefits of the ‘Presumptive Tax Scheme.’ Under this, the company is not required to maintain any book of account, which relieves the pressure on entrepreneurs.

With these tax benefits, tax planning for companies becomes easier. It leaves more funds in their account to innovate and develop newer ideas. The goal of the government is to help start-ups in building self-sustaining businesses.

Carry forward of losses

Startups recognized by the Department of Promotion of Industries and Internal Trade (DPIIT) can carry forward losses incurred in any of their first 10 years of incorporation for 10 subsequent years. This significantly extends the usual 7-year window for companies not considered startups. This benefit applies even if there’s a change in shareholding during the 10 years, as long as the original shareholders hold at least 51% of the voting power on the last day of the year in which the loss was incurred and the last day of the year in which the loss is set off.

Section 54GB

Section 54GB, amended by the Finance Act of 2016, exempts capital gains from selling residential property if invested in startup company shares. This incentive was introduced to assist individuals or HUFs wishing to establish or invest in startups through residential property sales. The exemption is conditional on the individual or HUF holding more than 25% of the company’s shares and the company utilizing the invested amount to purchase new assets before the investor’s due tax return filing date.

Way Forward

The government’s commitment to fostering innovation and economic growth is evident through various tax benefits designed specifically for startups. By leveraging these opportunities, start-ups can not only navigate the challenges of uncertainty and risk but also contribute substantially to the economic growth of the nation. As India continues to position itself as a hub for innovation and emerging businesses, the collaboration between the government and entrepreneurs, supported by these tax-saving measures, lays a strong foundation for sustained success and prosperity in the dynamic field of start-ups.

Key Takeaways

• The government offers 100% tax exemption to startups for the initial three years.
• Startups receive a 20% tax exemption on capital gains, providing relief on profits earned from company stocks.
• Section 54GB exempts capital gains from selling residential property if the proceeds are invested in shares of a startup company.
• Losses incurred by a company not publicly held or not eligible as a startup under section 80-IAC may be carried forward and set off against income.