India provides various tax benefits to help startups reduce their tax liabilities, freeing up capital and resources for reinvestment and growth. These benefits play a crucial role in enhancing profitability and enabling startups to scale efficiently. Here’s an overview of the tax incentives available to startups in India:
1. Tax Holiday Under Section 80-IAC
Government-recognized startups are eligible for a 100% tax exemption on profits for three consecutive years within their first ten years of incorporation.
- To qualify, the startup’s turnover must be below ₹100 crore.
- The three years can be chosen at the discretion of the startup during this ten-year period.
2. Reduced Corporate Tax Rates
General Corporate Tax Rate for Startups
Under the new tax regime, domestic startups and companies can benefit from a reduced corporate tax rate of 22% (plus applicable surcharge and cess), provided they do not claim specified exemptions or deductions under the Income Tax Act. This rate is significantly lower than the earlier rate of 30%.
Special Tax Rate for New Manufacturing Startups
To stimulate the manufacturing sector, the government has introduced a special tax rate of 15% (plus surcharge and cess) for startups involved in manufacturing or production. Conditions include:
- The company must be incorporated on or after October 1, 2019.
- Manufacturing or production should commence before March 31, 2024.
- The company must not claim any other exemptions or deductions under the Income Tax Act.
This incentive aims to encourage startups to invest in manufacturing, create jobs, and contribute to economic growth under initiatives like “Make in India.”
3. Angel Tax Exemption
Angel tax applies to funds raised by startups through the issuance of shares priced above their fair market value (FMV). The excess amount (share premium) is treated as income under Section 56(2)(viib) of the Income Tax Act and taxed accordingly.
Startups recognized by the Department of Promotion of Industry and Internal Trade (DPIIT) are exempt from angel tax, provided they meet the specified conditions. This exemption relieves startups from paying taxes on funds raised through share premiums.
4. Capital Gains Exemption
The capital gains exemption allows investors to reinvest profits earned from the sale of assets, like property, into startups without paying capital gains tax.
For example, under Section 54GB of the Income Tax Act:
- If an investor sells a residential property or other eligible assets, the profit (capital gain) is usually taxable.
- However, if this capital gain is reinvested into a DPIIT-recognized startup as equity, the tax on those gains is exempt.
5. ESOP Tax Benefits
Employee Stock Option Plans (ESOPs) help startups attract and retain talented employees by offering them ownership in the company. Traditionally, ESOPs are taxable at the time of exercise, creating a financial burden for employees.
Under the new tax relief for DPIIT-recognized startups, employees can defer the tax payment on ESOPs. The tax liability is postponed until:
- The employee sells the shares,
- The end of 48 months from the exercise date, or
- The employee leaves the company,
whichever of the above three occurs first.
This makes ESOPs more employee-friendly by reducing the immediate financial impact on employees.
6. GST Concessions
The GST regime offers valuable concessions to startups:
- GST Composition Scheme: Startups with a turnover of less than ₹1.5 crore can opt for the scheme, simplifying compliance with reduced tax rates (1% for traders and manufacturers) and quarterly return filing.
- GST Refunds for Exports: Exporting startups can claim refunds on input taxes paid, as exports are zero-rated under GST.
These concessions help startups save money, reduce administrative burdens, and focus on growth and innovation.
7. R&D Incentives
Startups investing in research and development (R&D) activities can benefit under Section 35(2AB) of the Income Tax Act. Companies conducting R&D in approved in-house facilities can claim a deduction of up to 150% of their R&D expenses.
This encourages startups to innovate by reducing the financial burden of developing new products, processes, or technologies.
8. Financial Support In addition to tax benefits, the government offers direct financial assistance to startups through schemes like the Startup India Seed Fund Scheme (SISFS). This program provides the initial capital needed to develop ideas, build prototypes, and validate products.
Conclusion
By utilizing these tax incentives, startups in India can significantly reduce their tax burden, enabling them to focus on growth and development. Effectively understanding and leveraging these benefits is crucial for driving startup growth. Startups that maximize these opportunities can achieve their full potential and succeed in the competitive business landscape.
Author
Ms. Mrunali Warbhe
Article Intern
Pavan Goyal and Associates (Chartered Accountants)
Office No. B212, GO Square, Mankar Chowk, Wakad, Pune 411057
Email: office@goyalca.com
Contact: 9762763351