How businesses can avail income tax benefits by registering under start-up India scheme?

Companies that are in their first stages of operations are termed as ‘Start Ups’. They are newly formed businesses having a problem-solving mindset and are run by one or more people. Generally, startups are formed when the founders identify some flaws in the current society and intend to address the problem by developing a product/service.

In recent years, India has rapidly become a hub for entrepreneurs and start-ups. Seeing this wave, the Indian Government introduced the Start-up India scheme in 2016 to boost entrepreneurship and create jobs in the country. This scheme has played a crucial role in boosting entrepreneurship and innovation in India. Since its launch, thousands of start-ups have been registered under the scheme, and many have benefited from the tax and non-tax benefits provided by the scheme. The scheme has also attracted significant investments into the start-up ecosystem, creating jobs and contributing to the country's economic growth.

The StartUp India scheme offers several benefits to start-ups, including tax benefits. In this blog, we will explore how businesses can benefit under income tax by registering themselves under the Start-up India scheme.

Prerequisite

The Startup India scheme was formulated by the Department for Promotion of Industry and Internal Trade (DPIIT). Registration under the Start-up India scheme is only possible when businesses meet various eligibility criteria and comply with various regulations and reporting requirements to avail of the benefits under the scheme. Start-ups also need to provide proper documentation, such as business plans, financial statements, and legal documents, to get recognized by the DPIIT and avail of the benefits under the scheme. Getting recognition by the DPIIT is very much necessary to access tax benefits/exemptions and easier compliance under the Startup India initiative.

Your start up must meet the certain prescribed criteria to be considered eligible for DPIIT startup recognition. After successful submission of your application, you will be provided with a recognition number for your startup. The certificate of recognition will be issued after the examination of all your documents.

Cases When Businesses Not considered as Start-Ups

→ If Company’s age exceeds 10 years from the Date of Incorporation

→ Companies which are not incorporated as a Private Limited Company, OPC, a Partnership Firm or a Limited Liability Partnership.

→ If annual turnover exceeds Rs. 100 crore for any of the financial years since its Incorporation

→If the entity has been formed by splitting up or reconstructing an already existing business.

Tax Benefits & Exemptions

The Start-up India scheme offers several benefits to start-ups, including tax benefits. The tax benefits under the scheme are available to eligible start-ups for a period of 10 years from the date of incorporation. Let's take a look at some of the tax benefits available to start-ups under the scheme.

Income tax exemption:

Start-ups that are incorporated after April 1, 2016, are eligible for income tax exemption for a period of 3 years. To be eligible for this benefit, the start-up must be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). This means that the start-up must meet certain criteria, such as having a turnover of less than Rs. 100 crores and being involved in innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property.

The income tax exemption under the Start-up India scheme is a significant benefit for start-ups, as it allows them to reinvest their profits back into the business and scale up their operations.

Tax exemption on investments:

Start-ups that receive investments from eligible investors are also eligible for tax exemption under the scheme. The exemption is available for investments made by eligible investors in the form of convertible notes, equity shares, or preference shares.

The tax exemption is available for investments made by angel investors, family offices, and funds registered with the Securities and Exchange Board of India (SEBI) as Category I or Category II Alternative Investment Funds (AIFs). The exemption is available for investments up to 25% of the total paid-up capital of the start-up, subject to a maximum of Rs. 25 crores.

This tax exemption on investments is a significant benefit for start-ups, as it encourages investments in the start-up ecosystem and helps start-ups to raise funds.

Capital gains tax exemption:

Start-ups that sell their shares to eligible investors are eligible for capital gains tax exemption under the Start-up India scheme. The exemption is available for long-term capital gains arising from the sale of shares of a start-up that is recognized by the DPIIT.

The capital gains tax exemption is available to eligible investors who have held the shares for a minimum period of 2 years. The exemption is available for investments made by angel investors, family offices, and funds registered with the SEBI as Category I or Category II AIFs.

The capital gains tax exemption under the Start-up India scheme is a significant benefit for start-ups, as it makes it easier for them to attract investment and raise funds.

Reduced tax on profits:

Start-ups that are recognized by the DPIIT are also eligible for a reduced tax rate of 25% on their profits. This reduced tax rate is applicable to start-ups that have a turnover of up to Rs. 250 crores in a financial year. This is a significant benefit for start-ups, as it helps them to save on taxes and reinvest their profits back into the business.

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Other Benefits

Apart from tax benefits, registering under the Start-up India scheme also brings other advantages. Start-ups registered under the scheme can access various government programs and schemes aimed at promoting innovation and entrepreneurship. These programs and schemes provide financial and non-financial support to start-ups, such as funding, mentoring, incubation, and patent filing assistance.

Other than tax benefits, startups recognized by DIPP can also avail Intellectual property Rights (IPR) related benefits such as IPR fast-tracking and more without requiring any other license from the Inter-Ministerial Board.

Moreover, start-ups registered under the scheme can access various networking and collaboration opportunities with other start-ups, investors, mentors, and industry experts. The scheme also provides start-ups with access to various online resources, such as tools, templates, and knowledge repositories, to help them manage their business effectively.

Conclusion

The Start-Up India scheme provides start-ups with a supportive ecosystem, access to various resources, and opportunities to scale up and grow their business. By registering themselves under the Start-up India scheme, businesses can take advantage of these tax benefits and save on taxes. This, in turn, can help businesses to reinvest their profits back into the business, scale up their operations, and attract more investment.