Startups are getting more and more common in India. Prime Minister Narendra Modi directed the government to establish and fund Startup India. The Startup India initiative aims to establish a strong ecosystem that facilitates the growth of businesses. Its mission is to empower entrepreneurs to leverage innovation and technology to expand.
Prime Minister Narendra Modi started the Startup India program in 2016 to promote entrepreneurship in India. The action plan aimed to support bank financing for startups, streamline the startup process integration, and offer various tax advantages and other incentives to business owners. For those seeking assistance, company registration consultants in Pune can provide valuable guidance.
However, startups are only eligible to utilize all of the benefits and exemptions if they fulfill the prerequisites in order to be designated as “Eligible Startups.”
First, let’s go over what needs to happen in order for a startup to be deemed “Eligible.”
Eligibility to be Recognized as a Startup Under the Startup India Plan
A startup is a newly established business that aims to sell a single product or service that its creators believe there is a demand for. For an organization to be eligible for the Startup India Action Plan, it must meet the following requirements:
- Young Company
The company must have been in operation for ten years following the date of registration or incorporation. Engaging company registration consultants in Pune can help ensure compliance with this requirement.
- Business Structure
The entity must be either a private limited company, a registered partnership, or a limited liability partnership. Expert advice from accounting consulting companies in Pune can aid in determining the best structure for your startup.
- Financial Threshold
Since the company’s establishment, no fiscal year has seen its annual turnover surpass Rs. 100 crore.
- Innovation Focus
The company’s main goal should be to create new goods, procedures, or services, or to enhance already-existing ones. However, it might also have a rapidly expanding business plan with the potential to create a large number of jobs or revenue. Assistance from accounting consulting companies in Pune can support innovation-focused startups in managing their finances effectively.
Starting a new firm by splitting up or reorganizing an established one is inappropriate.
Startup India Program Allows Eligible Startups to Receive Tax Exemptions
To support the Made in India and Startup India initiatives, the Indian government has announced a variety of tax breaks for Indian companies. Startups are eligible to qualify for the following various exclusions:
A tax Holiday of 3 Years
Any startup that registers or incorporates between April 1, 2016, and March 31, 2022 is eligible for this incentive. (The Finance Bill 2023 seeks to amend Section 80-IAC of the Income Tax Act, 1961 and extend the period for the incorporation of eligible startups by one year, until March 31, 2024. Qualifying startups who incorporate during this period will get a tax benefit for three of the ten years that follow the date of incorporation.) A startup will be entitled for a 100% tax credit on earnings for three years within a seven-year block if its annual turnover does not exceed Rs. 25 crores in any given financial year. This will help the businesses achieve their working capital requirements in the early years of operation. Registering a company in India is simplified with the assistance of knowledgeable consultants.
Long-term Capital Gains are Shielded from Taxes
Section 54 EE has been inserted to the Income Tax Act to exclude qualifying startups from paying taxes on long-term capital gains. This exclusion is only applicable if the long-term capital gain is invested, in whole or in part, in a fund to which the Central Government has provided notification within six months of the asset transfer date.
You can invest up to Rs 50 lakh in the specified long-term asset. This amount will be invested for a period of three years in the specified fund. If the funds are removed before the three-year period has elapsed, the exemption will be eliminated in the year that they are removed.
Investments Beyond Fair Market Value are Tax-free.
The government has abolished the tax on investments made in eligible startups that surpass fair market value. Non-venture capital funds, resident angel investors, and family members are some of the people who have made these investments. Additionally, incubators are exempt from paying taxes on investments beyond the fair market value.
Tax Exemption Under Section 54GB
The existing provisions under Section 54GB provide the exemption from tax on long-term capital gains from the sale of a residential property if such gains are invested in small or medium-sized firms as defined by the Micro, Small and Medium Enterprises Act of 2006. As of right now, nevertheless, this section has been amended to additionally exempt capital gains from taxes on investments made in eligible startups.
Therefore, if an individual or HUF sells a residential property and utilizes the capital gains to buy 50% or more of the equity shares of eligible startups, no tax on long-term capital will be due as long as the shares aren’t transferred or sold within five years of the acquisition date.
Furthermore, the startups are not allowed to transfer the assets they purchase within five years of the date of purchase; instead, they must use the invested cash to purchase assets.
This exemption will boost investment in eligible startups, hence promoting their growth and expansion.
Permission for Carry-Forward Loss Set-Off
The following requirements must be satisfied for a company to be eligible to carry forward losses under section 79 of the Income Tax Act: the loss must have occurred over the course of seven years after the company’s incorporation, and on March 31, the year the loss is to be carried forward, the shareholders with voting power in that year must still be in possession of their shares.
Final Thoughts and Expert Guidance from Sachin Gujar & Associates
Navigating the Startup India plan and taking full advantage of its benefits can be complex. At Sachin Gujar & Associates, we specialize in guiding startups through the process. As leading company registration consultants in Pune, we provide comprehensive services that cover everything from registering a company in India to offering expert accounting consulting services in Pune. Our startup services include advisory on various schemes and incentives, income tax advantages, and more. With a team of experienced professionals, we ensure your startup is well-positioned to thrive. Let us help you turn your entrepreneurial vision into a successful reality. Contact us today to learn more.
