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As per the Start-up India Action plan, the followings conditions must be fulfilled to be eligible as Start-up:

1. Up to 10 years from the date of incorporation/registration

2. Is a private limited company or registered as a partnership firm or a limited liability partnership.

3. Has an annual turnover not exceeding Rs. 100 crores for any of the financial years since incorporation/registration.

4. Is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

5. It is not formed by splitting up or reconstructing a business already in existence.

Tax exemptions allowed to Eligible Startups under Startup India Program

1. 3-year tax holiday in a block of seven years:

  • Start-ups will be eligible for getting 100% tax rebate on profit for a period of three years in a block of seven years. This will help the start-ups to meet their working capital requirements during their initial years of operation. Such deduction would be available upon filing an application with DPIIT provided that annual turnover does not exceed Rs.25 crores in any financial year.

2. Exemption from tax on Long-term capital gains u/s 54EE:

  • 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 If withdrawn before 3 years, then the exemption will be revoked in the year in which money is withdrawn.

3. Tax exemption on investments above the fair market value:

  • 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.

Tax exemptions allowed to Eligible Startups under Startup India Program

4. Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Start-ups u/s 54GB:

  • The existing provisions u/s 54GB allows the exemption from tax on long-term capital gains on the sale of a residential property if such gains are invested in the small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act, 2006. But now this section has been amended to include exemption on capital gains invested in eligible start-ups also.
  • 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 asset purchased within 5 years from the date of its purchase.
  • This exemption will boost the investment in eligible start-ups and will promote their growth and expansion

5. Set off & carry forward losses and capital gains allowed in case of a change in Shareholding pattern.

  • The carry forward of losses in respect of eligible start-ups is allowed if all the shareholders of such company who held shares carrying voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year in which such loss is to be carried forward. The restriction of holding of 51 per cent of voting rights to be remaining unchanged u/s 79 has been relaxed in the case of eligible start-ups.

6. Other benefits available for Start-ups:

  • Simple process for registration of start-up
  • Self-certification of compliance under Environment and Labour laws.
  • Easy access to funds through Alternate Investment Funds.
  • Easy winding up of Company within 90 days under IBC,2016.


Author Bio

I (CA Kaushal Gupta) am qualified Chartered Accountant since 2018. PS: If you have issue about Income tax, GST, MCA, TDS, please contact at 7037999666 or type your issue at pcakg1989@gmail.com. View Full Profile

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July 2024