Startups enjoy a number of income tax exemptions and benefits. Below is a list of 6 such benefits every startup must know.
Under Startup India Initiative, the recognized startups or investments in such startups have been exempted under several sections of IT Act. Below is a list of 6 such benefits under Income Tax act, every startup must know. (There are several other benefits under MSMEs, other than income tax benefits, you can read them in a separate post on this link: 6 Important Benefits Every MSME Must Know ! )
1. Profits exempted from Income Tax:
A DPIIT recognized Startup is eligible to apply to the Inter-Ministerial Board for full deduction on the profits and gains from business (exemption under Section 80IAC of the Income Tax Act) provided the following conditions are fulfilled.
The entity should be
- a private limited company or a limited liability partnership,
- incorporated on or after 1st April 2016 but before 1st April 2021, and
- products or services or processes are undifferentiated, have potential for commercialization and have significant incremental value for customers or workflow
The deduction is for any three consecutive years out of ten years from the year of incorporation of start-up. (Turnover up to INR 100 crores)
2. Income Tax Exemption on Investments:
DPIIT Recognized Startups are exempt from tax under Section 56(2)(viib) of the Income Tax Act, when such a startup receives any consideration (investment) for issue of shares which exceeds the Fair Market Value of such shares.
The startup has to file a duly signed declaration in Form 2 to DPIIT {as per notification G.S.R. 127 (E)} to claim the exemption from the provisions of Section 56(2)(viib) of the Income Tax Act.
3. Capital gain exemption on property sale:
Amendment in Section 54GB of the Income-tax Act provides exemption from tax on capital gains arising out of sale of residential house or a residential plot of land if the amount of net consideration is invested in prescribed stake of equity shares of eligible Startup for utilizing the same for purchase of specified asset.
a. The condition of minimum holding of 50% of share capital or voting rights in the start-up is relaxed to 25%.
b. The period of extension of capital gains arising from sale of residential property for investment in start-ups has been extended up to 31st March 2021.
4. Carry forward of Losses:
Startups can carry forward their losses on satisfaction of any one of the following two conditions, as per amendment in Section 79 of Income Tax Act:
- Continuity of 51% shareholding/voting power or
- Continuity of 100% of original shareholders
5. ESOPs Tax deferrals to startup employees:
ESOPs of startup employees will not be liable to tax immediately on exercise of the option by such employees. The tax on such ESOPs are deferred until happening of one of the below three cases:
- Five years after exercising the option.
- The year in which they sell shares.
- The year when the employee leaves the company
6. Capital Gain Tax Exemption if invested in fund of startups:
Exemption from tax on long-term capital gain can be availed if such long-term capital gain is invested in a fund notified by Central Government. The maximum amount that can be invested is INR 50 lakhs as per section 54EE in the Income Tax Act, 1961.
Post by: Mangesh Mandlik,
About the Author: Mangesh is a tax enthusiast and leads Finance and Tax Team in Datapalm India.
Startups should be aware of the benefits available for MSMEs in India here.