Tax Benefits and Exemptions available to recognised Startups

13 May 2022

A.   Tax Exemption under 80 IAC- 3 year tax holiday in a block of seven years

At the initial stage, most of the startups are bootstrapping their organizations out of their hard-earned money. One of the ways to enhance the earnings is to reduce the cost. Government retains 30% of income in the form of tax which leads to increased cost. A registered startup can avail of an exemption from payment of income tax for three consecutive years out of the first 10 years from the date of its incorporation, given that the annual turnover does not exceed Rs.25 crores in any financial year and the startup fulfills the below-mentioned criteria. This will help the startups to meet their working capital requirements during their initial years of operation.

Eligibility Criteria for exemption under 80IAC

● The entity should be a DPIIT recognised startup

● Only Private Limited Companies or Limited Liability Partnerships are eligible for tax exemption under Section 80IAC

● The startup should have been incorporated after 1st April, 2016

Documents required for exemption application under 80IAC

● Memorandum of Association for Pvt. Ltd. / LLP Deed

● Board Resolution (If Any)

● Annual Accounts of the startup for the last three financial years

● Income Tax returns for the last three financial years

B.   Exemption from tax on long term capital gains

Section 54GB relates to tax on long-term capital gains received upon the sale of a residential property of an individual. Section 54 EE has been inserted in the Income Tax Act for the eligible startups to exempt their tax on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by the Central Government within a period of six months from the date of transfer of the asset.

The maximum amount that can be invested in the long-term specified asset is Rs 50 lakh. Such amount shall remain invested in the specified fund for a period of 3 years. If withdrawn before 3 years, then the exemption will be revoked in the year in which money is withdrawn.

C.   Section 56 Exemption- Tax exemption on investments above the fair market value

The government has exempted the tax being levied under section 56(2)(viib) of the Income Tax Act on investments above the fair market value in eligible startups. Such investments include investments made by resident angel investors, incubators, family or funds which are not registered as venture capital funds, accredited investors, non-residents, AIFs (Category I) and listed companies with a net worth of more than INR 100 Crore or turnover more than INR 250 Crore shall be exempt under Section 56 (2) VIIB of Income Tax Act. The consideration of shares received by eligible startups shall be exempt upto an aggregate limit of INR 25 Crore

Eligibility criteria for exemption under section 56

● Should be a private limited company recognised by DPIIT

● Not Investing in specified asset classes as provided under notification No. G.S.R. 34 (E) dated January 16, 2019 notified on February 19, 2019.

● Startup should not be investing in immovable property, transport vehicles above INR 10 Lakh, Loans and advances, capital contribution to other entities, except in the ordinary course of business.

D.   Tax exemption to Individual/HUF on investment of long-term capital gain in equity shares of Eligible Startups u/s 54GB.

Section 54GB allows exemption on capital gains arising from transfer of residential property (a house or a plot of land) owned by an Individual or HUF subject to fulfillment of various conditions such as:

● Net consideration arising out of such transfer is utilised for subscription in the equity shares of an eligible start-up fulfilling prescribed conditions; and

● Such eligible start-up has utilised this amount for purchase of new asset within one year from the date of subscription in equity shares by assessee.

The startups shall also use the amount invested to purchase assets and should not transfer asset purchased within 5 years from the date of its purchase.

E.    Set-off of carry forward losses and capital gains

In the case of a closely held company, Section 79 imposes certain conditions to set off the carried forward losses. Where substantial change has happened in the voting power of a company, the carried forward losses cannot be set off by such a company. However, in the case of an eligible start-up, such losses can be carried forward on the satisfaction of any of the two conditions specified below:

Condition 1: Continued 51% shareholding

In the year of set-off of losses, at least 51% of voting power is beneficially held by the same persons who held them as on the last day of the year in which loss was incurred; or

Condition 2: Continued 100% shareholders with the same voting rights

100% of shareholders, on the last day of the previous year in which loss was incurred, should continue to hold the same shares on the last day of the previous year in which loss is to be set-off. Further, such losses should have been incurred during seven years beginning from the year of incorporation of the company.

F.    Easy Winding up of Company

This is to ease the shut down or wind up operations of the startups. This will allow the entrepreneurs to reallocate capital and resources to more productive avenues faster.

To encourage entrepreneurs to experiment with new and innovative ideas without facing complex exit processes where their capital stuck in case of business failure.

As per the Insolvency and Bankruptcy Code, 2016, startups with simple debt structures, can be wound up in 90 days of filing the application for insolvency. An insolvency professional can be appointed for the Startup who can be in charge of the company including liquidation of its assets and paying its creditors within six months of such appointment.Upon appointment of the insolvency professional, the liquidator shall be responsible for the swift closure of the business, sale of assets and repayment of creditors in accordance with the distribution waterfall set out in the IBC. This process will respect the concept of limited liability.

G.   Patent Application and IPR Application

The objective is to reduce the cost and time taken for a startup to acquire a patent, making it financially viable for them to protect their innovations and encouraging them to innovate further. A panel of facilitators have been established to assist the startup in filing of applications and the entire fees of the facilitators for any number of patents, trademarks or designs that a Startup may file shall be borne by the Central Government and only the statutory fees shall be borne by  the Company.

H.    Deferment of payment of tax on ESOPs

When an employer allots shares to an employee under the ESOP scheme, free of cost or at a concessional rate, it is taxable as perquisite. The value of such perquisite shall be the fair market value of the shares on the date of exercising ESOPs as reduced by the amount recovered from the employee. The perquisites arising under the ESOP scheme shall be taxable in the hands of employees in the year in which shares are allotted to the employees. Nothing shall be taxable when shares are just vested but not allotted.

However, if the employer is an eligible start-up, fulfilling the conditions prescribed under section 80-IAC, the tax shall not be payable or deductible on the perquisite arising from ESOPs in the year of allotment of shares. The employer shall be liable for deduction or payment of tax within 14 days from the earliest of the following events:

  • From the expiry of 48 months from the end of the assessment year in which shares are allotted under ESOP Scheme;
  •  From the date on which assesse ceases to be the employee of the organization; or
  • From the date of sale of shares allotted under ESOP.

I. Easier Public Procurement Norms

The objective is to make it easier for startups to participate in the public procurement process and allow them to access another potential market for their products. Startups need to be recognized under Department for Promotion of Industry & Internal Trade as part of eligibility criteria.

Opportunity to list your product on Government e-Marketplace: Government e Marketplace (GeM) is an online procurement platform and the largest marketplace for Government Departments to procure products and services. DPIIT Recognized Startups can register on GeM as sellers and sell their products and services directly to Government entities. This is a great opportunity for startups to work on trial orders with the Government.

Exemption from Prior Experience/Turnover: In order to promote startups, the Government shall exempt Startups in the manufacturing sector from the criteria of “prior experience/ turnover” without any compromise on the stated quality standards or technical parameters. The Startups will also have to demonstrate requisite capability to execute the project as per the requirements and should have their own manufacturing facility in India

EMD Exemption: DPIIT recognized startups have been exempted from submitting Earnest Money Deposit (EMD) or bid security while filling government tenders. 

J. Self-Certification Benefits:

DPIIT recognized startups that are within 5 years of incorporation qualify for the below self-certification benefits.

  • Startups shall be allowed to self-certify compliance for 6 Labour Laws and 3 Environmental Laws through a simple online procedure.

·In case of labor laws, no inspections will be conducted for a period of 5 years. Startups may be inspected only on receipt of credible and verifiable complaint of violation, filed in writing and approved by at least one level senior to the inspecting officer.

In case of environment laws, startups which fall under the ‘white category’ (as defined by the Central Pollution Control Board (CPCB) would be able to self-certify compliance and only random checks would be carried out in such cases

These policies were made with an objective to give a much-needed boost to the budding entrepreneurial ventures. It is a subsidiary of the `Make in India' scheme and aims to create more jobs within the country. This startup tax policy will definitely give the much-needed boost to the startups creating a conducive environment for employment and wealth creation. 


The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife Consulting is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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