In recent years, India has witnessed a surge in entrepreneurial enthusiasm. Startup India stands as a prominent initiative led by the Government of India, which intends to catalyse startup culture and build a strong and inclusive environment for innovation and entrepreneurship.

Under the Startup India initiative, qualifying companies have the opportunity to attain recognition as startups by DPIIT (Department for Promotion of Industry and Internal Trade), enabling them to unlock a range of advantages including tax benefits, simplified compliance processes and more.

Eligibility Criteria for Startup Recognition:

1. The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership.
2. Turnover should be less than INR 100 Crores in any of the previous financial years.
3. An entity shall be considered as a startup up to 10 years from the date of its incorporation.
4. The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.
5. An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”.

This article explores tax breaks, startup tax exemptions and other benefits that make Startup India more attractive for budding entrepreneurs.

1. Income Tax Exemption:

Once recognized, eligible startups can avail themselves a tax holiday under section 80 IAC of the Income Tax Act for three consecutive financial years out of first ten years following their incorporation, exempting them from paying income tax on their profits. This fiscal breather allows startups to reinvest their earnings into business expansion, research, and development, fostering innovation and sustainability.

2. Capital Gains Tax Exemption:

Investors supporting recognized startups can avail themselves of a capital gains tax exemption. If an investor sells a long-term asset (residential property) and reinvests the proceeds in funding a recognized startup, the capital gains from the property sale can be exempted subject to certain conditions under section 54GB. This incentivizes investors to actively participate in the startup ecosystem, attracting much-needed capital for these enterprises.

3. Exemption under Section 56:

Startups registered with DPIIT startup registration are exempted from the Angel Tax (tax levied on investments above the fair market value) under Section 56. This means that funds received by these startups from angel investors or venture capitalists are not treated as income, alleviating the tax burden on genuine investments. The key condition for exemption is that the aggregate amount of paid-up share capital and share premium of the startup after the issue or proposed issue of shares does not exceed INR 25 crore.

4. Deferment of payment of tax on ESOPs

ESOP allotment at concessional rates is a taxable perquisite, based on share fair market value at exercise, minus employee recovery. For eligible start-ups under sec. 80-IAC, no immediate tax applies on ESOP allotment. Tax responsibility shifts to the employer: due within 14 days after 48 months post allotment’s assessment year end, employee’s exit, or share sale. Tax is at applicable rates during allotment or share transfer.

5. Innovation and Patent Protection:

Startup India encourages startups to invest in research and development by providing assistance for filing patents. Eligible startups can avail an 80% rebate in the fees associated with filing a patent, making it more accessible for them to protect their intellectual property.

6. Set-off of losses:

The carry forward of losses in respect of eligible start-ups is allowed if –
the shareholders who had voting power in the year when the loss was incurred are in possession of their shares on 31st March of the year in which it is to be carried forward, and the loss has been incurred across 7 years of the company’s incorporation. The restriction of maintaining a 51 percent holding of voting rights, as outlined in section 79, has been eased specifically for eligible startups.

7. Fund of Funds for Startups (FFS):

To address the perennial challenge of funding, Startup India has introduced the Fund of Funds for Startups (FFS). Under this scheme, the government allocates funds to SEBI-registered Alternative Investment Funds (AIFs), which, in turn, invest in startups. This multi-layered approach not only injects capital into the startup ecosystem but also provides startups with access to mentorship and guidance from experienced investors.

8. Reduced Compliance Burden:

The government has streamlined various compliance procedures for recognized startups. These include self-certification for labor and environmental laws, reducing the bureaucratic burden on entrepreneurs. Due to this, startups can thrive without being bogged down by excessive paperwork, allowing them to channel their energies into innovation and growth. The emphasis on startup recognition underscores the commitment to facilitating a more conducive environment for emerging businesses.

9. Government Organisations, Schemes & Policies:

Several ministries and departments under the Government of India, have launched initiatives aimed at offering financial, infrastructural, and regulatory assistance to startups. These schemes span diverse sectors such as technology, manufacturing, agriculture, healthcare, and others. NewGen Innovation and Entrepreneurship Development Centre, Sustainable Finance Scheme, Venture Capital Assistance Scheme are some of them.

10. Encouragement to Women Entrepreneurs:

Startup India has initiated a range of initiatives and schemes dedicated to enhancing women entrepreneurship. This has led to establishment of supportive networks and communities and has facilitated partnerships among various stakeholders within the startup ecosystem.

11. Ease of Winding Up:

Startups can avail themselves of a fast-track insolvency resolution process, ensuring a more straightforward and less cumbersome winding-up process. This encourages entrepreneurs to take risks, knowing that the system supports them even in the face of failure.

Startup India has thus created an environment where entrepreneurial dreams can flourish. The initiative goes beyond mere financial incentives, addressing the multifaceted challenges that startups encounter in their journey.

It becomes crucial for the Startups to choose a consultant who comprehends the unique requirements and objectives of the startup, offering customised guidance accordingly. collaborating with BCL India, possessing expertise in the startup ecosystem and profound knowledge of the Startup India program, can markedly streamline your registration process, improve compliance, and optimise the benefits accessible to startups through this initiative.