Tax Benefits For Startups In India
- January 2, 2019
- By, CA.Vishranth.B.L
What is a startup?
A company or LLP or Partnership Firm fulfilling following conditions will be a startup in India as
per the Startup India policy:
- It should have started not earlier than five years since the initiative was given shape.
- The annual turnover of the venture must not exceed INR 25 crores.
- The company must be a pioneer in its area of expertise and must be pushing for innovation.
- It must be a new venture and not one formed by the splitting up or revamping of an earlier
What are the Tax Exemptions?
- 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
- 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.
- Financial benefits: Startups will get an 80% rebate on patent costs. This means, that if and
when a startup applies for a patent, the government will come to its aid by funding the
defence of the patent. The company will thus get a rebate of 80% in the fees. Moreover, the
government will also pay the fees of the facilitator and help obtain the patent. Patent
registration and protection of Intellectual Property Rights (IPRs) will be faster and the
- 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
- 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
- Presumptive tax schemes for entities whose turnover falls below INR 2 crores
- Employee Provident Fund provision of no inspection for the first three years