Learn about the income tax exemption checklist for startups, including eligibility criteria, benefits, and the process to avail exemptions and angel tax relief.

Checklist of Income Tax Exemption For Start Up

→ It should be a Private Limited, or LLP

→ It should be Incorporated on or after 01/04/2016.

→ It should be a DIPP recognized startup

→  Memorandum of Association (in case of Company and LLP Deed in case of LLP)

→ Board Resolution for Authorization to person who is filling the particular Application.

→ Balance Sheet (CA Certified)

→ Profit & Loss (CA Certified)

→ Income Tax Return

→ Video link (Product or Services in which Company is Dealing with)

→ Pitch Deck

→ Angel Tax Exemption availed if yes then that certificate is to be attached else not required.

Points to be remembered:

It should be a new initiative not to be formed by splitting up or reconstructing of already existing Businesses.

Thus, if an individual or HUF sells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible start-ups, then tax on long-term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition.

The start-ups shall also use the amount invested to purchase assets and should not transfer assets purchased within 5 years from the date of their purchase.

Benefits of this Scheme

Startups are eligible for 100% exemption of tax excluding the Minimum Alternate Tax  (MAT) which will follow the 18.5% of the profit as stated in the books, on earnings for the first three years.

To qualify, startups must be registered with the Department of Industrial Policy and Promotion (DIPP). Such a benefit helps startups as the business set up costs is in itself a substantial financial burden on entrepreneurs and hence, getting away without having to pay tax for three years will help them balance out their expenditure and break even sooner, leading to higher profits later on.

Another benefit provided by the government to help startups is a fund that has an initial corpus of  Rs 2,500 Crores and a final corpus of  Rs 10,000 Crores lasting four years. This comes under the Funds of Funds (FOF) benefit which will serve as the direct investment under the direction of SEBI and will only apply to startups registered under DIPP.

Companies raise capital through sharing stock and the profits earned by engaging in such dealings are known as capital gains and thus are eligible to be taxed. Startups receive an exemption of 20% of their capital gains resulting in them having to pay less tax on profits earned through the sales of stocks, bonds, and shares.

Domestic companies are required to issue their shares at fair market value (FMV) determined on net assets value basis or discounted cash flow basis determined by the merchant banker. Any amount received by the company from residents in India in excess of FMV is liable to tax in the hands of the company (popularly known as ‘Angel tax’). Upon filing the requisite declaration with DPIIT and subject to certain conditions, Eligible start-ups are exempted from Angel tax.

A new section 54 EE has been inserted in the Income Tax Act for the eligible start-ups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by the Central Government within a period of six months from the date of transfer of the asset.

The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall be remained invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then the exemption will be revoked in the year in which the money is withdrawn.

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March 2024