What Are The Tax Exemptions Currently Available For Startups?

The Indian government has introduced tax exemptions for startups to promote the Startup India and Make in India programs. Startups registered between April 1, 2016 and March 31, 2022 can claim a 3 years tax holiday, long-term capital gains exemption under section 54EE, and investments above fair market value. Section 54GB allows individuals/HUFs to invest in SMEs or purchase 50% or more shares of eligible startups, and carry forward losses if shareholders have voting power in the year.

Tax 2024 written on a notepad, represents financial planning & record-keeping for the consecutive year

Tax Exemptions and Benefits for Startup in 2024

A startup is a new firm created to provide a single product or service that its manufacturers believe is in high demand. To qualify for tax and government advantages,

  • startup must be under 10 years old. In short, the company must have completed less than ten years after its incorporation/registration.
  • To be eligible for startup-related benefits, the company must be registered as a private limited company, a partnership with limited liability, or a partnership firm.
  • Its annual turnover after incorporation should not exceed ₹100 crores. The startup should be aimed at the development and creation of products and services.

India's prime minister, Shri Narendra Modi, unveiled several ambitious plans to improve the nation's startup environment. The project is intended to support struggling business owners and motivate them to operate more practically. The government wants to use consumer-focused firms and digital to grow the economy. According to the Startup India Action Plan, a "Startup" is an individual entity that must register with the Indian government (not earlier than five years) and have an annual turnover of no more than 100 crores in any given financial year.

Eligibility Criteria for applying to 80IAC Income Tax exemption

Every Indian startup can file for a tax exemption under Section 80 IAC of the Income Tax Act. The Startup should have been incorporated after 1st April, 2016. To qualify for this tax exemption, the startup must be recognized, and only private limited companies or limited liability partnerships are eligible. The company’s or LLP’s annual business turnover doesn’t exceed Rs. 100 Crore in the year preceding the assessment year, for which deduction is claimed as per section 80-IAC. By doing so, they are able to concentrate on establishing their business without having to worry about taxes to an excessive degree.

Tax Exemption under Section 56 of the Income Tax Act (Angel Tax)

The new business should be registered in the Department of Industrial Policy and Promotion. The startup's total paid-up share capital and share premium, following any planned shares, does not exceed the total amount of INR 25 crore. However, consideration received for shares issued to a non-resident, a venture capital fund, or a new capital sale shall not be included in the total amount of paid-up capital.

Capital Gains Exemption (Section 54EE)

The government created a new section 54EE to exempt long-term capital gains from taxation. According to this clause, all qualifying startup can claim an exemption from long-term capital gains tax if the gains are placed in a central government-specified fund within 6 months of the transfer date. The maximum investment amount is 50 lakhs, which should be held in the fund for three years. In case, if the money is withdrawn before three years, the exemption will be called off.

Tax Exemption Under Section 54GB

Individuals or Hindu Undivided Families (HUFs) can receive a tax exemption under Section 54GB of the Income Tax Act if they invest their long-term capital gains from the sale of residential property in qualifying startups. Formerly this section only allowed an exemption for investments in small or medium-sized businesses under the Micro, Small, and Medium Enterprise Act 2006.

According to Section 54GB of the Income Tax Act, if an individual or HUF sells a residential property and uses the proceeds to invest in SMEs or purchase 50% or more shares in eligible startup, they are prevented from paying long-term capital gains. However, the exemption will only be applicable if the shares are not sold within 5 years of acquisition. Startup must also use the funds invested to purchase the assets and not sell or transfer them within five years after purchase.

Tax Exemption on Investment above Fair Market Value (FMV)

Fair market value (FMV) is the cost that a product would sell for in the open market with the following assumptions:

  • Both buyers and sellers have sufficient knowledge of the asset and act in their best interests.
  • Both parties are away from undue pressure and are allowed a reasonable timeframe to complete the transaction.

Tax authorities generally ensure that transactions are realized at fair market value (FMV), at least for tax reasons. Assume the FMV of the shares is higher. In this situation, tax authorities such as the Internal Revenue Service (IRS) may recharacterize the transaction for tax reasons. These investments include those made by angel investors, incubators, funds, and individuals who aren't recognized as venture capital (VC) funds. Solely put, angel investors' investments that exceed the company's fair worth are tax deductible. This gives startup additional capital to execute their operations.

Exemption on Carry-Forward Losses

Companies may carry forward losses under specific conditions, according to Section 79 of the Income Tax Act. To carry forward a loss, shareholders who filled voting power at the time of the loss must still own their shares on March 31st of the year in question. The losses must have occurred within seven years of the company's development. Similarly, establishing a startup may carry forward their losses if all shareholders with voting power on the last day of the year still own their shares on that date. This provision enables businesses, even startup, to offset their losses against future profits, offering some comfort financially while pushing them to continue operations and pursue expansion.

Contact the best Tax service provider in Chennai

In conclusion, with our comprehensive guide to tax exemptions and benefits for startups in 2024, Excellent Corporate Service emerges as the premier tax consultant and service provider in Chennai. Our expertise and dedication ensure that startups navigate tax laws effectively, maximizing financial gains while remaining compliant. Trust ECS for unparalleled support and guidance as you embark on your entrepreneurial journey.

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