List of Tax Benefits for Startups in India

Last Updated at: October 23, 2019
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List of Tax Benefits for Startups in India
List of Tax Benefits for Startups in India

India is growing and has already become the third largest start-up supporting economy. It is developing day by day and will soon become the most prominent tech startup hub in the world. To encourage and nurture startups in India, the government has announced several programmes through which they can avail benefits, one of them being the STARTUP INDIA program. The main aim of this initiative is to create an environment that helps startups in the country and pushes for the progress of entrepreneurs. Here’s a look at the tax benefits these startups can avail and how they can use these programs to fuel their growth.

Define a startup

Here’s a list of conditions that must be met, to define a company as a startup in India as per the Startup India policy:

  1. It should have started not earlier than five years since the initiative was given shape.
  2. The annual turnover of the venture must not exceed INR 25 crores.
  3. The company must be a pioneer in its area of expertise and must be pushing for innovation.
  4. It must be a new venture and not one formed by the splitting up or revamping of an earlier enterprise.

Tax Exemptions

Startup programs help entrepreneurs by providing them with several tax benefits, and those which function as private limited companies, limited liability partnership or Partnership firms may also be eligible for other benefits as per the schemes available to them.

Make Your Business GST Ready

First three years

Startups are eligible to 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 avail of this benefit, the startup must be registered under the Department of Industrial Policy and Promotion (DIPP). It must also be one that pushes for innovation and development of new products and services related to intellectual property. Such a benefit helps startups as the cost of setting up 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.

Funds

Another benefit provided by the government to help startup is a fund which has an initial corpus of INR 2500 crores and a final corpus of INR 10000 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. With financial shortage being the most prominent problem faced by companies early on in their journey, such a benefit comes as a welcome relief for many and will serve as a considerable accelerator for the growth of such ventures.

Capital Gain Tax

Companies raise capital through sharing stock and the profits earned by engaging in such dealings is 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.

Angel Investment Tax

Investments serve as significant sources of funding for entrepreneurs, but when a venture, starts, it might not be able to capture the trust of investors and hence might not be able to find a large number of brokers and investors who are ready to spare their cash. Consequently, entrepreneurs are left with no choice but to approach angel investors who negotiate with the entrepreneur on terms regarding interest and amount payable. The government in a bid to help entrepreneurs gain access to the capital they require has abolished the, thereby making investments made by angel brokers non-taxable.

The amendment of Section 56(2) (vii) (b) of the Income Tax Act has also given entrepreneurs the right to issue shares at a higher rate than the value noted in the books helping them raise funds with more ease.

Other Provisions

Apart from such tax benefits, the government has introduced several provision that helps and supports entrepreneurs in the country. Some of these are as follows.

  • Funds up to INR 500 crores have been set aside to help support entrepreneurs who belong to the Schedule Tribe and Scheduled Caste sect and also to help Women Entrepreneurs.
  • Lowering of Long-term capital gains from three to two years
  • Amendment of the Motor Vehicle Act to encourage entrepreneurship
  • Presumptive tax schemes for companies whose turnover falls below INR 2 crores while these schemes were earlier available to businesses whose turnover fell below INR 1 crores.
  • Employee Provident Fund provision for the first three years.

Indian government officials have realised that the best way to push innovation forward is to help entrepreneurs with their taxation related woes. All the provisions stated above help entrepreneurs avail tax benefits and gain funds and in the long run, help them establish self-sustainable companies.

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