Tax Benefits Available for Startups
All tax benefits are available to the startups only if they come under the criteria of an ‘Eligible Startup’. So let’s try to understand the conditions to be met to qualify as an ‘Eligible Startup’.
Eligibility Criteria for Startup Recognition:
- The Startup should be incorporated as a private limited company or registered as a partnership firm or a limited liability partnership (LLP).
- Turnover should be less than INR 100 Crores in any of the previous financial years since incorporation.
- An entity shall be considered as a startup up to 10 years from the date of its incorporation.
- The Startup should be working towards innovation/ improvement of existing products, services and processes and should have the potential to generate employment/ create wealth.
- An entity formed by splitting up or reconstruction of an existing business shall not be considered a “Startup”
Tax benefits allowed to Eligible Startups :
- 80 IAC Tax exemption:
An Eligible startup (incorporated between 1 April 2016 to 31 March 2022) can avail deduction of 100% of profits for a block of 3 years in the first 7 years of its incorporation. Such deduction would be available upon filing an application with DPIIT provided that that annual turnover does not exceed Rs.25 crores in any financial year.
- Waiver from ‘Angel tax’ Domestic companies are required to issue their shares at fair market value (FMV) determined on net assets value basis or discounted cash flow basis determined by the merchant banker. Any amount received by the company from residents in India in excess of FMV is liable to tax in the hands of the company (popularly known as ‘Angel tax’). Upon filing the requisite declaration with DPIIT and subject to certain conditions, Eligible startups are exempted from Angel tax.
- Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups u/s 54GB. The startups shall also use the amount invested to purchase assets and should not transfer asset purchased within 5 years from the date of its purchase.
1. Thus, if an individual or HUFsells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition.
2. The existing provisions u/s 54GB allows the exemption from tax on long-term capital gains on the sale of a residential property if such gains are invested in the small or medium enterprises as defined under the Micro, Small and Medium Enterprises Act, 2006. But now this section has been amended to include exemption on capital gains invested in eligible start-ups also.
Exemption from tax on Long-term capital gains
A new section 54 EE has been inserted in the Income Tax Act for the eligible startups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by the Central Government within a period of six months from the date of transfer of the asset.
The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall be remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then the exemption will be revoked in the year in which money is withdrawn.
Other benefits available for Startups :
- Simple process for registration of startup
- Self-certification of compliance under Environment and Labour laws.
- Easy access to funds through Alternate Investment Funds.
- Easy winding up of Company within 90 days under Insolvency & Bankruptcy Code,2016.
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