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Tax Exemptions and Eligibility for Start-ups in India

Last Update Date : April 30, 2019
Estimated Read Time: 4 min

For a developing country like India where employment has always been a challenge, the government is looking towards promoting new businesses and start-ups which can create employment opportunities. To enhance the same, the Start-up India Action Plan has been initiated by the Government of India. One of the primary focus of such initiative is to provide financial relaxations and ease the compliance for setting up a new venture by discarding the restrictive government policies and relaxing certain provisions. Let’s study, how one can benefit from such plan.

Tax implications on start-ups

Meaning of Start-up

A start-up is generally a newly set-up venture which is growing and which may offer an innovative product or service which could not be existing or which could be developed to serve the consumer in a more appropriate way.


Eligible businesses

  • Eligible businesses means the businesses which involves innovation, improvement or development of goods and services that have the potential to be commercialised and that are marketable.
  • Also, businesses having ample potential of creation of jobs and wealth come under the ambit of eligible businesses.

Eligible Start-ups

A Partnership, Limited Liability Partnership (LLP) or a company is eligible for tax exemption under the Start-up India Action Plan provided:

  • It is incorporated / registered under the Companies Act, 2013 or any other law in force on or after 1st April 2016 but before 1st April 2019.
  • The turnover of the business does not exceed ₹ 25 Crores in any of the previous years starting from April 2016 to March 2021.
  • It is having a certificate of eligible business from Inter-Ministerial Board of Certification as notified in the Official Gazette by the Central Government.
  • It is not incorporated by splitting up or by the way of reconstruction of an existing business.
  • It is recommended and certified in a proper format provided by SIPP (Start-ups Intellectual Property Protection).
  • It is funded by a business incubator which is funded by Government of India working on any government project.
  • It is funded by investors registered with SEBI.
  • It has a patent granted by Indian Patent and Trademark.
  • It should be noted that the proprietorship business and the PSUs do not come under the ambit of eligible start-ups.

Tax Implications

  • The profits of the eligible start-ups are 100% exempt from tax for any 3 consecutive years out of the first seven years of its operation, and ten years in case of biotechnology start-ups provided the turnover does not exceed ₹ 25 Crore in any of the financial year. This will boost start-ups in the initial years of its operation to meet its working capital requirement.
  • The capital gains arising out of the sale of any capital asset is exempt from tax under section 54EE for an eligible start-up provided that the gains/proceeds shall be invested in the funds notified by Central Government within six months from the date of such transaction.
    This investment is restricted up to a maximum limit of ₹ 50 lakhs. Also, a lock-in-period of 3 years is attached to such investment, the withdrawal of which before the said term will revoke the exemption.
  • The eligible start-ups are however liable to pay the Minimum Alternate Tax [MAT] at the rate of 18.5% along with the applicable surcharge and cess.
  • It should be noted that if the start-ups fail to make any profits in the first 5 years of its operation, they are exempt from MAT.
  • To claim the exemption and tax benefits under the Start-up India Action Plan, eligible start-ups need to:
  • Maintain separate books of account of the business
  • Get their accounts audited by a Chartered Accountant
  • Furnish the Audit Report in Form 10CCB along with ITR
  • Under section 54GB of the Income Tax Act, 1961 exemption to individuals and HUF is granted on long-term capital gains arising from the sale/transfer of residential property being invested into the equity shares (50% or more) of such eligible start-ups.
    However, there is a lock-in period of 3 years to such investment. If the investment is withdrawn before of the expiry of such period, the exemption shall also be reversed and the capital gains shall be chargeable to tax.
  • The concept of ‘Angel tax’ has also been terminated wherein if a residential angel investor invests in an eligible start-up even above the fair market value, shall be exempt from tax.
  • The losses of the eligible start-ups can be carried forward to the subsequent financial year which is subject to zero changes in the equity shareholding or the voting rights of such entity from the last date of the financial year in which loss was incurred to the last date of the financial year in which the loss is being carried forward.
  • If an individual holds more than 50% of the equity capital, the funds so invested shall be utilized to buy the assets for the company before the due date of filing returns.
  • In addition to the financial relaxation, the start-ups are also assisted with the legal formalities related to the intellectual property rights protection and the registration of patents in a much faster, better and easier manner.

The initiative taken for promoting the start-ups have pushed various entrepreneurs to start new ventures. However, it has helped to boost entrepreneurship in India. The plan is aimed to promote finance to such new establishments. Therefore, it is necessary to know everything about it.

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CA Chetan Shinde
Chetan is the Lead Tax Advisor at H&R Block (India) with an experience of almost half a decade in audit and taxation. His professional areas of interest are GST advisory and statutory audit. Apart from taxation, he is passionate about social causes and works extensively towards rural school development and literacy.

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