We get your business up and moving. We are a passionate bunch of number crunchers /budget heads. Whether it be an entire overhaul of your accounting department, managing your payrolling, or simply serving you as a bookkeeper – we are here.
Meta description: Are you a startup searching for some tax incentives? Read this blog to learn about all the pretty income tax benefits you can enjoy as a startup in India.
The startup culture has taken India by storm in the last few years. All thanks to the startup funding in India, which has attracted investors from all over the globe. Furthermore, a news report in The Economic Times states that India is the 3rd largest startup ecosystem in the world. The first two are the United States of America and China.
Besides, do you know the number of startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) as of 2022? A whopping 80,152 startups. Unbelievable, right?
The question is: Is the government doing something to help these startups thrive? The answer is a big fat YES! The government initiated the Startup India campaign in 2016 to do the following–
But before we see the income tax benefits, let’s first understand what qualifies as a ‘Startup.’
Not every new business can be eligible for benefits under the Startup India Action Plan. You must meet the following set of criteria set by the authorities:
Now that you know the criteria to become an eligible startup under the Startup India program, let’s move on to the income tax benefits an eligible startup can enjoy!
This scheme was open to startups established between April 1, 2016, and March 31, 2021. However, the 2021 budget extended the eligibility until March 31, 2022.
In a block of seven years, such startups would be eligible for a three-year period during which they will get a 100% tax refund on profits, provided that their annual turnover does not exceed Rs. 25 crores in any financial year. As a result, the firms will be better able to cover their early working capital needs.
Domestic corporations must issue their shares at fair market value (FMV). You may calculate the FMV using the merchant banker’s discounted cash flow or net asset value model.
Every sum the firm receives from Indian citizens over FMV is subject to tax in the hands of the company (often referred to as “Angel tax”).
But qualified start-ups are free from Angel tax after submitting the necessary declaration with DPIIT and subject to specific requirements.
According to Section 54GB, long-term capital gains from the sale of a residential property are free from taxation if invested in small or medium-sized businesses as defined by the Micro, Small, and Medium Businesses Act of 2006.
But this provision has now changed. It now allows an exemption for capital gains from investments in qualified start-ups. Hence, tax on long-term capital will be avoided if a person or HUF sells a residential property and invests the capital gains to purchase 50% or more equity shares of the qualified startups, provided that you don’t sell or transfer the shares within 5 years of the date of their acquisition.
The companies must also utilise the money invested in buying assets and keep those assets for five years after they are obtained before transferring them.
This exemption will encourage investment in qualified companies and foster their development and growth.
The Income Tax Act contains a new section 54 EE that allows qualifying startups to avoid paying tax on long-term capital gains provided they invest all or a portion of those gains in a fund approved by the Central Government within six months of the asset’s transfer date.
You may invest amounts up to Rs. 50 lakh in the long-term defined asset. This sum must stay invested for three years in the designated fund. But if you withdraw the money before 3 years, the exemption will be terminated in the same year.
The income tax regime allows for business loss carryover and setoff. Nevertheless, setoff is refused if there is a 50% or more change in the ownership structure of such a private firm from that of the year of loss.
But here’s a catch! An Eligible startup is exempt from this criteria for losses incurred in the first seven years if the shareholders who had shares in the year of the loss continue to own shares in the year of setoff.
Amongst the many proposals outlined in the Budget 2023 by the Hon’ble Finance Minister, Smt. Nirmala Sitharaman, the following are the ones that address eligible startups under the Startup India program:
With its Startup India initiative, the government has taken significant steps to support the startup ecosystem in India. We are optimistic that after reading this blog, you have a fair understanding of the available benefits and the government’s goals behind the same.
However, if you feel stuck, GJM & Co. is always here to help! Our expert accountants and tax professionals will help you understand the nitty-gritty of these tax incentives and offer the best advice on financial management for your startup. We will also be happy to take care of other financial aspects such as bookkeeping, accounting, income tax return filings, and more to help you stay on top of your finances.
Should you have any queries or need consultation, Schedule a Call today or write to us at info@gjmco.in.