Budget 2016: Incentives for Start-ups

Last Updated at: Dec 03, 2020
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On 6th October, 2020, the Department for Promotion of Industry and Internal trade launched an online platform called ‘Startup India Showcase’. It aims to spread awareness about some of India’s most promising startups. The website will include startups from various sectors such as social impact, fintech, healthtech, enterprise tech, and edtech among others.


The present government’s aims to boost the Indian economy through the start-up ecosystem. To this end, in 2016, it introduced a string of tax incentives for budding entrepreneurs and businesses. Since few start-up owners are aware of these benefits, we explain some of them in this short article.

The Union Government has several options to boost the Indian economy. The one it seems to be betting on pretty heavily, given its relative size, is the start-up ecosystem. Since the beginning of its tenure, the Union Government has come on strong on the potential for start-ups to propel India into the big leagues. And in 2016, a string of tax incentives have been announced. Here’s what a start-up can now expect:

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Complete Deduction: A complete deduction of profits and gains is available to all start-ups in three of their first five years, so long as the business is involved in developing new products or services, driven by new technology or intellectual property. This is available to companies incorporated before April 1, 2019. This amendment will take effect from 1st April, 2017.

Fund of Funds: The Modi Government, in its Start-up India Action Plan, has announced a Fund of Funds, which will raise a total of Rs. 10,000 crore across four years to finance start-ups.

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Section 54EE: The Finance Bill, 2016 proposes to insert Section 54EE into Income Tax Act. This relates to a stop on payment of capital gains on investment in units of specified funds. Therefore, if a start-up invests in units of certain funds notified by the Central Government, there will be no payment of capital gains. This will take effect on April 1, 2017 and will apply to following assessment years.

To put it concisely, a start-up can get a full deduction of profits and gains in three of their first five years. Additionally, under the Start-up India Action Plan, the Fund of Funds initiative ensures finding funding will be more accessible. Lastly, Section 54EE of the Income Tax Act allows no payment of capital gains!

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