The Startup ecosystem in India is growing rapidly. This growth has also been reflected in the nation’s overall economic progress. To promote more startups, the Indian government has launched various programmes through which they give various incentives to startups.
Tax exemptions and tax benefits directly help in the growth and expansion of startups. The government of India provides various tax benefits and exemptions to startups. Proper utilisation of these benefits will help them to reduce their tax liability and retain more capital. They can also increase their cash flow and profits. Some of the major tax exemptions available for Indian startups are listed below:
1. Tax Holiday Under Section 80-IAC
One of the biggest tax benefits for startups in India is the tax holiday under Section 80-IAC of the Income Tax Act. Eligible startups can get 100% tax exemption on profits for 3 consecutive years out of the first 10 years from the date of incorporation. Only a Private limited or a Limited Liability Partnership is eligible for Tax exemption under Section 80IAC. The Startup should have been incorporated after 1st April 2016.
2. Exemption from Angel Tax Under Section 56
Angel tax refers to the tax paid on the excess amount received by a company over the fair market value of its shares. This tax is taxable under section 56 of the Income Tax Act. However, DPIIT-recognized startups are exempt from angel tax under Section 56. This exemption helps startups to attract investments without worrying about additional tax.
3. Exemption on Long-Term Capital Gains Under Section 54EE
Startups can get tax exemption on long-term capital gains if the gains are invested in a fund notified by the government. This exemption is available up to INR 50 lakh. The investment must be held for 3 years to be eligible for this exemption.
4. Exemption on Long-Term Capital Gains Under Section 54GB
Section 54GB of the Income Tax Act provides exemption on long-term capital gains arising from the transfer of residential property if the proceeds are used for the purchase of 50% or more shares of an eligible startup. The startup must use the investment to purchase new assets like computers or other plants and machinery.
5. Carry Forward of Losses and Capital Gains
DPIIT recognized startups are allowed to carry forward their losses and capital gains if there is no change in the shareholders holding at least 51% of the voting power. This is very useful for startups as they can set off their losses against future profits and get relief during the initial years of business.
