A Complete Tax Guide for Startups in India

Startups in India are growing rapidly. The trend has encouraged people with distinct ideas to develop a real plan for offering services much in demand. The Government of India has provided clear regulations to facilitate the incorporation of startups in India. Further, to nurture and help the startups grow, tax* regulations were introduced.

The startups should bear in mind the government regulations as they are quite beneficial to the startups at the time of income tax filing in India. Let us look into the tax implications and benefits available to startups in detail.
 

Eligible Startup

A startup is a venture formed by young entrepreneurs with unique ideas. Over significant developments and revenues, it could become a good business opportunity. So what are the important factors to consider for the eligibility of a startup?

According to the Startup India Action Plan, a few points form the eligible criteria for a startup.
 

1. It should be a private limited company, limited liability partnership or a partnership firm.
2. The entity should not have completed ten years since its incorporation in India.
3. Annual turnover is less than Rs 100 crore in the previous financial years.
4. It is not formed by restructuring or splitting up an already existing business in India.
5. The enterprise should work towards developing, innovating or enhancing products and services aiming for employment generation or wealth accumulation.

Taxation for Startups in India

Let us glance through the important tax regulations that govern eligible startups.

Tax Holiday: Any startup company incorporated in the period from April 1, 2016, to March 31, 2022 extended to March 31 2023 as per finance act 2022, is eligible for this benefit. It can avail a 100% tax exemption on the profits earned for a block of three years in the first ten years of incorporation. It should have also not crossed Rs. 25 crores as turnover in any financial year reckoned above.

This provision called a tax holiday is provided to help them meet their working capital requirements in the initial years of incorporation.

Angel Tax: Domestic companies have to issue their shares at a fair market value. It is determined based on the net asset value or discounted cash flow determined by the respective merchant banker.

If the company receives investment from an angel investor or any other fund from residents in India, then the startup is liable to pay the Angel Tax.

Tax exemptions to Individuals/Hindu Undivided Family: According to the tax laws, any long-term capital gain made from the sale of a residential property invested on a startup will qualify for income tax exemption provided these conditions are met:
 

1. The capital gain is used to subscribe to 50 per cent or more equity shares in the startup.
2. The shares purchased are not transferred or sold out within five years since the acquisition.
3. If the startup uses that share of money to purchase an asset, it cannot be transferred for five years since its purchase.
4. It is a way to contribute towards business expansion and growth.

Exemption from Long Term Capital Gains (LTCG): According to the Income Tax Act, if long-term capital gain amounts are used to purchase shares in a registered and recognized startup within six months from the transfer of an asset, such amounts are considered for tax exemption.

The maximum amount that can be invested in the asset is Rs. 50 Lakh. The amount can be invested in a fund for three years. If the fund is withdrawn within three years, then the tax exemption is revoked.

Relaxation for set off and carry forward of losses incurred: The Income Tax Act provides for set-off and carries forward losses incurred in India's startup businesses. If the private company has a 50 per cent or more change in the shareholding set up of the company from the year of loss, then the set-off is denied. However, this condition is not for eligible startups incurring losses in the first seven years of incorporation. Instead, it is provided, the shareholders hold their respective shares in the company in the year of loss and continue next year to set-off.

Relaxation in the taxation of Employee Stock Options (ESOP) for the startups’ employees: If the eligible startup issues ESOP to the employees on or after April 1, 2020, there is a tax deduction applicable , however as per the finance act the same has been deferred subject to fulfilment of conditions.

These tax benefits, along with other incentives, have nurtured the flow of growth prospects in startups. Some of the prominent provisions are:
 

• Easy steps to register a startup,
• Simple patent application and easy tracking process to support innovation,
• Relaxed norms for External Commercial Borrowing, and
• Access to funds through Alternate Investment Funds.

Startups can insist the employees purchase a life insurance policy with term insurance benefits to protect their family's financial security and get tax benefits on their income.

TATA AIA's Life Insurance term plan returns are quite attractive, and TATA AIA Life Insurance online provides an easy approach to insurance purchases. Employers can also check out the group term insurance plans from Tata AIA Life.

Conclusion

Having seen the eligibility criteria for a startup, tax implications and benefits, we must abide by the regulations to have a smooth growth pattern.

Tax benefits ensure government support to enhance the growth prospects. Learn the provisions in detail and incorporate them to save tax in India. Ensure success when you have a distinct pathway towards innovation and moral purpose.

L&C/Advt/2022/Sep/2058