Tax Benefits Available to Start-ups

Last Updated at: Oct 30, 2020
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As per the Finance Act, 2020, startups registered with the Department for Promotion of Internal Trade and Industrial Policy (DPIIT) are eligible to get tax exemption under Section 54 (GB) of the Income Tax Act. Section 54GB relates to tax on long-term capital gains received upon the sale of a residential property of an individual. The government has exempted individuals from payment of this tax if such long-term capital is invested in a registered startup.


A new business needs all the help it can get. However, we know of many startups who are simply too involved in building their brand to worry about their accounts, forget about their taxes.

Now, you may argue that they are focussing on what matters more, but many businesses ultimately fall under because they have run out of money when they needed it the most. This is where keeping your books and doing your taxes comes to your rescue. For one, it can save you money, which can be put into better use for the improvement of your business, and another, you will be complying with all norms, thereby remaining in the good books of investors and clients.

Venture capitalists and finance companies also look at your credit ratings as well as the order of your books before putting their foot in to help. So let us look at the major tax benefits available to start-ups.

Tax Deductions

Whether it is paying for your company incorporation, complying with the Registrar’s requirements or any other expense associated with setting up and building your business, everything is tax deductible. Also, for the first five years after the incorporation of your business, you can deduct the total amount in increments of 1/5th.

Furthermore, the Budget 2016 has given a whooping three-year tax holiday to startups. Under the Make in India policy, the first three years after incorporation have been made 100% tax deductible, making it a credible investment to keep books and file returns without worrying about paying tax on profits.

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Working from Home

There is no problem with working from home if you convert it into an office. You can register your company from your residence (even if it is rented or in your parent’s name). Those running a business from home can, in fact, claim deductions on your property taxes and utility bills, too.

Buying Health Insurance

If, as an employer, you are buying a company or group insurance for all your employees, you will get deductions under Section 80-G. Although you might actually not save money here, think about it as a means of employee retention, and therefore, a way to improve your business opportunity.

Keep the Bills

Any receipts and invoices need to be kept. They can all be used to claim deductions and exemptions. Moreover, it will prove to potential investors that your business is actually operational.

Getting a Tax Refund

Your business will have paid taxes (deducted at source), when it is not actually required. The only way to get this money back is by claiming a tax refund after filing for tax returns. Thus, without the filing of income tax returns, you cannot bring back that extra amount paid as tax.

Presumptive Taxation Scheme

If you have a small business, with a gross turnover less than Rs. 2 crore, you are eligible for the presumptive tax scheme. The Budget 2016 has increased the existing ceiling of Rs. 1 crore to Rs. 2 crore, thereby including those startups which are in the higher revenue category. Hence, accordingly, you, as a startup, can declare an income at the prescribed rate of 8%. If your income exceeds this limit of Rs. 2 crore, you need to declare a higher rate.