Definition of Startup

To bring uniformity in the identified enterprises, the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, Government of India has come out with a definition for an entity to be considered as a Startup. Recently, DPIIT has issued the Notification for

Startup India Definition and the current article briefs the same.

Definition of Startup

Any company that falls into the below list of categories will be called “Startup” and eligible to be recognized by the DPIIT to avail the benefits from the Government of India.

Age of the Company: The Date of Incorporation/registration should not exceed 10 years
Type of Company: The Company should be incorporated as a private limited company (as defined in the Companies Act, 2013) or registered as a partnership firm (registered under section 59 of the Partnership Act, 1932) or a limited liability partnership (under the Limited Liability Partnership Act, 2008) in India.
Annual Turnover - Turnover of the entity for any of the financial years since incorporation/ registration has not exceeded Rs.100 crore rupees.
Innovative & Scalable - Entity should be working towards innovation, development, or improvement of products or processes or services or a scalable business model with a high potential for employment generation or wealth creation.

Note:

An entity formed by splitting up or reconstruction of an existing business shall not be considered a ‘Startup’.
An entity shall cease to be a Startup on completion of ten years from the date of its incorporation/ registration or if its turnover for any previous year exceeds Rs.25 crore rupees.

Process of Recognition as a Startup

The process of recognition of an eligible entity as a startup shall be as under A Startup shall make an online application over the mobile app or portal set up by the

Department for Promotion of Industry and Internal Trade The application shall be accompanied by the following documents:

A copy of the Certificate of Incorporation or Registration
A write-up about the nature of business highlighting how it is working towards innovation, development, or improvement of products or processes or services, or its scalability in terms of employment generation or wealth creation
The DPIIT may, after calling for such documents or information and making such enquires, as it may deem fit recognize the eligible entity as Startup or reject the application by providing reasons.

Certification for section 80-IAC of the Income Tax Act

A Startup being a private limited company or limited liability partnership, which fulfills the conditions specified in section 80-IAC of the Income-tax Act needs to make an application in Form-1 along with documents to CBDT for obtaining a Tax exemption certificate. After calling for such documents and making inquiries, as it may deem fit, CBDT will grant the certificate or reject the application by providing reasons.

Exemption under section 56 of the Income Tax Act

A Startup shall be eligible under clause (ii) of the proviso to clause (vii) of sub-section (2) of section 56 of the Income Tax Act and consequent exemption from the provisions of that clause if it fulfills the following conditions:

The startup has been recognized by DPIIT
The aggregate amount of paid-up share capital and share premium of the startup after issue or proposed issue of a share, if any, does not exceed twenty-five crore rupee

Computing the Aggregate Amount of paid-up Share Capital

For computing the aggregate amount of paid-up share capital, the amount of paid-up share capital and share premium of Rs.25 Crores in respect of shares issued to any of the following persons shall not be included:

A non-resident
A venture capital company or a venture capital fund

Considerations received by such startup for shares issued or proposed to be issued to a specified company shall also be exempt and shall not be included in computing the aggregate amount of paid-up share capital and share premium of twenty-five crore rupees The startup should not invest in any of the following assets:

The building or land appurtenant, being a residential house, other than that used by the Startup to rent or held by it as stock-in-trade, in the ordinary course of business
Land or building, or both, not being a residential house, other than that occupied by the Startup for its business or used by it for purposes of renting or held by it as stock-in-trade, in the ordinary course of business
Loans and advances, other than loans or advances extended in the ordinary course of business by the Startup where the lending of money is a substantial part of its business
The capital contribution made to any other entity
Shares and securities
A motor vehicle, aircraft, yacht, or any other mode of transport, the actual cost of which exceeds ten lakh rupees, other than that held by the Startup to ply, hire, leasing, or as stock-in-trade, in the ordinary course of business
Jewelry other than that held by the Startup as stock-in-trade in the ordinary course of business
Any other asset, whether like a capital asset or otherwise, of the nature specified in sub-clauses (iv) to (ix) of clause (d) of Explanation to clause (vii) of sub-section (2) of section 56 of the Act.

Note: The Startup shall not invest in any of the assets specified in sub-clauses (a) to (h) for the period of seven years from the end of the latest financial year in which shares are issued at a premium

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Frequently Asked Questions

Common questions about Startup Definition in India: Criteria & Benefits by DPIIT.

The company should be a private limited company, partnership firm, or limited liability partnership incorporated/registered in India. It should not be more than 10 years old, have an annual turnover less than Rs. 100 crores, and work towards innovation, product/process development, or a scalable business model with high employment or wealth creation potential.

A startup needs to make an online application on the DPIIT mobile app or portal, along with a copy of the incorporation/registration certificate and a write-up explaining how it meets the innovation, scalability, or employment generation criteria. DPIIT will then evaluate the application and grant or reject startup recognition.

A private limited company or limited liability partnership startup recognized by DPIIT needs to apply in Form-1 to the Central Board of Direct Taxes (CBDT), along with relevant documents. After due scrutiny, CBDT will grant or reject the tax exemption certificate.

This exemption allows startups to receive share premium amounts up to Rs. 25 crores from certain specified investors without being taxed on the premium as income. This facilitates easier fundraising for startups.

The startup must be DPIIT-recognized, have an aggregate paid-up capital and share premium not exceeding Rs. 25 crores, and not invest in specified asset classes like real estate, loans, shares, jewelry, or luxury vehicles for 7 years after share premium issuance.

The aggregate excludes share capital and premium received from non-residents, venture capital firms/funds, and specified companies. This allows startups to raise higher amounts from such investors without breaching the Rs. 25 crore limit.

No, an entity formed by splitting up or reconstruction of an existing business will not be considered a 'Startup' under the DPIIT definition.

A company will cease to be a Startup if its turnover exceeds Rs. 25 crores in any previous year, or if 10 years have elapsed since its incorporation or registration.

The key documents are a copy of the incorporation/registration certificate and a write-up explaining how the entity qualifies as an innovative, scalable, or employment-generating startup.

No, a startup recognized under Section 56(2)(vii) cannot invest in residential buildings or land, or commercial buildings/land other than those used for its own business operations or stock-in-trade, for 7 years after issuing shares at a premium.