Tax benefits for Startups in India

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In 2016, Prime Minister Narendra Modi launched the Startup India program to encourage more people to start businesses in India. The action plan aimed to promote bank financing for entrepreneurs, as well as streamline the starting process and provide tax exemptions and other incentives to them.

However, all of the perks and exemptions are only available to companies that meet the criteria of an ‘Eligible Startup.’

So, first, let’s go over the requirements for being an “Eligible Startup.”

Startup India Eligibility

The following conditions must be met to be considered a startup, according to the Startup India Action Plan:

  1. Has not yet been completed ten years from its incorporation or registration.
  1. Is the business a private limited company, a partnership firm, or a limited liability partnership?
  1. For any of the financial years since incorporation/registration, the yearly turnover has not exceeded Rs. 100 crore.
  1. Is it a scalable business model with a strong potential for job creation or wealth creation, or is it working toward innovation, development, or enhancement of products, processes, or services?
  1. It is not founded by dismantling or recreating an existing firm.

Long-term capital gains are exempt from taxation.

A new section 54 EE of the Income Tax Act has been added to allow qualifying startups to defer paying tax on long-term capital gains if the gain, or a portion of it, is invested in a fund authorized by the Central Government within six months of the asset transfer date.

In the long-term defined asset, the maximum amount that can be invested is Rs 50 lakh. For three years, this sum must be put in the designated fund. If money is withdrawn before three years, the exemption is revoked in the year the money is withdrawn.

Exemption from taxes on investments that are worth more than their fair market value

The government has waived the tax on investments in qualifying startups that exceed their fair market value. These contributions can come from local angel investors, family, or funds that aren’t registered as venture capital funds. Incubator investments that exceed fair market value are also exempt.

Individuals and HUFs are free from paying tax on long-term capital gains invested in equity shares of Eligible Startups under section 54GB.

The present rules u/s 54GB exempt long-term capital gains on the sale of residential property from taxation if those gains are invested in small or medium firms as defined by the Micro, Small, and Medium Enterprises Act, 2006. However, this section has recently been updated to allow an exemption for capital gains invested in qualifying start-ups.

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