Requirements For Claiming Startup India Tax Benefits

The Government of India has announced the "Startup India" initiative for creating a conducive environment for startups in India. Startups which are recognized by the DPIIT enjoy a variety of tax incentives and support from the Government. According to the latest Startup notification, an entity shall be considered as a "Startup" for the purpose of Startup India scheme if it satisfies the following conditions:

Incorporated as a private limited company or a registered as a partnership firm or an LLP.
It hasn't completed 10 years from the date of its incorporation or registration.
Its turnover for any of the financial years since incorporation has not exceeded Rs.100 crores.
It is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.
It should not be an entity formed by splitting up or reconstruction of a business already in existence.

Important Tax Benefits for Startups

The following are three major tax benefits that a Startup can enjoy under the Startup India scheme:

Tax Holiday under Section 80IAC

Section 80IAC of the Income Tax Act provides a three year tax holiday in respect of profits and gains of a startup. The startup would be allowed a deduction from gross total income an amount equal to 100% of the profits and gains - effectively making the income tax-free. An eligible startup can claim the deduction for any 3 consecutive assessment years out of 7 years beginning from the year in which the startup is incorporated.

Section 54GB Capital Gains Exemption

Section 54GB was amended by the Finance Act, 2016 to provide an exemption of capital gains arising out of the sale of residential property on investing the same in shares of startup company. This exemption was provided with an objective of providing relief to an individual or HUF who would like to setup or

start a company by selling a residential property. This exemption is subject to the condition that the individual or HUF hold more than 25% of shares of the company and the company uses the amount invested to purchase new assets before the due date of filing of return by the investor.

Angel Tax Relief

The Finance Bill has a provision that any consideration received by a closely held company in excess of the fair market value of its shares would be taxable. This provision for taxation can be avoided by companies that enjoy relief from angel tax.

Approvals for Tax Incentive

The following are some of the major points to be kept in mind before applying for Startup India tax benefits:

Partnership Firms Not Eligible

It must first be noted that partnership firms are not eligible for any tax holiday under Section 80IAC. Further, investor promoter would not be eligible for capital gains exemption for money invested in a partnership firm from sales of residential house/land under Section 54GB. Finally, the concept of relief of Angel Tax only applies to private limited companies. Hence, only LLP and company can enjoy relief under Section 80IAC and Section 54GB.

Inter-Ministerial Board Approval

A startup that merely satisfies the definition of a startup will not entitle it to tax holiday under Section 80IAC of the Act or Section 54GB or angel tax. To avail the tax holiday for a startup entity under Section 80 IAC and capital gains exemption for investor-promoter investment in a startup, the startup must be certified by the Inter-Ministerial Board for that purpose. Further, angel tax applies only to private limited companies and to avail exemption, the company must have been recognized by DPIIT.

DPIIT Recognition

To avail angel tax exemption, a Startup must be recognised by the DPIIT. The procedure for making an application for DPIIT recognition is fairly simple and straight forward as follows:

The application should be made through the online portal setup by DPIIT
The application should be made using the phone and email of the Startup promoters
The application should contain
- Copy of certificate of incorporation
- Write up about the nature of business and how it is working towards innovation, development, improvement of products or processes or services or scalability in terms of employment generation or wealth creation.

After reviewing the above details, the DPIIT may call for additional documents or recognize the startup or reject the application. On recognition of the startup by DPIIT, the startup would be eligible for claiming exemption from levy of angel tax under Section 56(2)(viib) of the Income Tax Act. In addition to the angel tax relief, Startups recognised by DPIIT would also enjoy the following benefits:

Self-certification of compliance under certain Environment & Labour Laws;
Startup Patent Application & IPR Protection;
Fast-track patent application with 80% rebate in filing patents;
Easier public procurement norms - Exemption from requirement of EMD, prior turnover and experience.

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Frequently Asked Questions

Common questions about Requirements for Claiming Startup India Tax Benefits.

An entity must be incorporated as a private limited company or registered as a partnership firm or LLP, have not completed 10 years since incorporation, have a turnover below Rs. 100 crores, work towards innovation or have a scalable business model with employment generation potential, and not be formed by splitting an existing business.

The three major tax benefits are: 1) Tax holiday under Section 80IAC allowing 100% deduction of profits for 3 consecutive years out of 7 years, 2) Capital gains exemption under Section 54GB when investing gains from selling residential property in a startup, and 3) Relief from "Angel Tax" on share premium.

No, partnership firms are not eligible for the tax holiday under Section 80IAC or the capital gains exemption under Section 54GB. Only private limited companies and LLPs can avail these benefits.

Yes, to avail the tax holiday under Section 80IAC and capital gains exemption under Section 54GB, the startup must be certified by the Inter-Ministerial Board. For angel tax exemption, the startup needs to be recognized by the DPIIT (Department for Promotion of Industry and Internal Trade).

A startup can apply for DPIIT recognition through an online portal by providing incorporation details, a write-up on its business model, and supporting documents. After review, the DPIIT may grant recognition, making the startup eligible for angel tax exemption.

DPIIT-recognized startups also benefit from self-certification under certain laws, startup patent application rebates, faster patent processing, and relaxed public procurement norms like exemption from EMD, prior turnover, and experience requirements.

No, the capital gains exemption under Section 54GB is only available when an individual or HUF invests gains from selling a residential property in shares of a company (not a partnership firm) and holds more than 25% of the company's shares.

Yes, the startup can claim the 100% deduction for any 3 consecutive assessment years out of the 7 years beginning from the year of its incorporation.

Yes, a startup can potentially avail both the tax holiday under Section 80IAC and the capital gains exemption under Section 54GB if it meets the respective eligibility conditions for each benefit.

Yes, DPIIT-recognized startups can avail an 80% rebate on patent filing fees and faster processing of startup patent applications under the Startup India scheme.