What are tax exemptions for startups in India?

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Prime Minister Narendra Modi launched the “Startup India campaign” on January 16, 2016, to promote entrepreneurship in the country. The action plan aims to strengthen the country’s eco-system for innovation and entrepreneurship, thereby fostering sustainable economic growth and creating large-scale employment possibilities. To accomplish the vision, the government promotes bank financing for start-ups, simplifies the incorporation process, and provides various tax exemptions and other incentives to entrepreneurs.

Who is eligible for the startups India action plan?

-Has not yet reached the ten-year mark of incorporation/registration.

-Is a private limited company, a partnership firm, or a limited liability partnership registered.

-Has not exceeded Rs 100 crore in annual revenue in any financial years since incorporation / registration.

-Is engaged in the innovation, development, or enhancement of products, processes, or services, or a scalable business model with a high potential for job creation or wealth creation.

– It is not founded by demolishing or rebuilding an existing firm.

What are tax exemptions?

Three-year tax holiday in a seven-year block

This scheme was open to startups formed between April 1, 2016, and March 31, 2021. Budget 2021 extended eligibility until March 31, 2022. These startups will be eligible for a tax rebate of 100 % on profits for three years in a block of seven years, provided that their annual revenue does not exceed Rs 25 crores in any fiscal year. This will assist entrepreneurs in meeting their working capital requirements during the early stages of their operations.

Capital gains on long-term investments are tax-exempt

The Income Tax Act has been amended to include a new section 54 EE that allows qualifying startups to exempt tax on long-term capital gains if the gain or a portion of it is invested in a fund notified by the Central Government within six months of the date of transfer of the asset.

A maximum of Rs 50 lakh may be invested in the specified long-term asset. This sum shall be held in the specified fund for a period of three years. If money is withdrawn before three years, the exemption is revoked in the year the money is withdrawn.

Exemption from taxation on investments in excess of their fair market value

The government has exempted the tax on investments in qualifying startups that exceed their fair market value. These investments may be made by resident angel investors, family members, or unregistered venture capital funds.