Know all about Tax Benefit for Start-Ups

To promote the Startups in India, The Government has provided certain tax Benefits which has been discussed below

Start-Ups

As per the Notification No.G.S.R.127(E), dated 19th February 2019 issued by Ministry of Commerce and Industry, an Entity or an Establishment can be called as a Startup if it satisfies the below conditions

• The entity should be incorporated as Private Limited company as defined under the companies act,2013 or the entity should be registered as a partnership under section-59 of the partnership act, 1932 or the entity should be registered as Limited liability partnership Firm under Limited liability partnership act, 2008 in India.
• The Turnover of the Entity or Establishment incorporated should not exceed Rs.100 crore during any of the financial years.
• The Entity or an Establishment so incorporated should strive towards innovation or development or improvement of products or processes or services and should have the capability to generate employment and wealth.
• The Entity or an Establishment shall be considered as a start-up for the period of 10 years from the date of its Incorporation.

 Procedure for recognizing a Startup

• An application shall be made to DPIIT  on online via mobile app or portal set up by the Department for Promotion of Industry and Internal Trade (DPIIT).
• The application should be enclosed with the following
  • A copy of registration or Incorporation certificate
  • Details of the nature of the business explaining the key processes and procedures of the entities capability.
• The DPIIT shall recognize the entity as start-up after calling such information and documents as necessary.

List of Tax Benefits for Start Up’s

Tax Holidays

As per section-80IAC of the Income Tax act,1961, there shall be granted a 100% tax exemption for a period of three consecutive financial years out of its ten years since incorporation. Provided that

• An entity should be recognized as a start-up
• Entity should either be a Private limited company or Limited Liability Partnership.
• An entity should be incorporated after 1st April 2016.
• Turnover should not exceed Rs.25 crores during in any of the Financial Years.

Angel Tax

Angel tax is a tax levied under section-56(2)(viib) of the Income Tax act, 1961, on the Capital raised from the investors by an unlisted company, where the issued share price value is in excess of the Fair market value of the company.

As per section-56(2)(viib) of the Income Tax act, 1961, the tax shall be levied on the value which is above the fair market value of the company. The difference between the share capital raised and the fair market value shall be treated as other sources of Income and levied to tax known as angel tax.

To promote the Start up’s, Tax exemption is provided under section 56 of the Income-tax (angel tax) if the following conditions have been satisfied

• The Startup should be recognized under the Department for Promotion of Industry and Internal Trade (DPIIT).
• The aggregate amount of paid-up share capital and share premium of the entity or establishment after the proposed issue of shares (if any), should not exceed Rs.25 Crores. 

Capital Gain Tax exemption

 As per Section 54EE of the Income Tax act, 1961, the Eligible Startups are exempted for their Long term capital gain, if Such gain has been invested in a fund notified by the Central Government within a period of six months from the date of transfer of asset.

The maximum amount that can be invested in the specified asset is Rs.50 lakhs.

The Lock-in period for such investments is three years.

Exemption Provided to Investors

As per Section 54GB, an Exemption on long term capital gain shall be provided to individual or HUF, if such proceeds have been invested in subscribing the equity share of a start-up company which utilizes the investment for the purpose of purchase of new plant & machinery within 1 year from the date of subscription of equity shares.