Startup growth accelerates with India's tax-Friendly policies
What's the story
India's startup ecosystem is on fire, with government-backed initiatives lighting the way for entrepreneurs to innovate and thrive.
Let's be real, taxes can feel like a maze for any founder. Fear not! In this guide, we'll decode the most essential income tax sections that directly benefit Indian startups.
From saving big on taxes to unlocking powerful incentives, we'll cover everything, so you can focus on building the next big thing without worrying about the fine print.
Tax holiday
Tax holiday for eligible startups
Indian startups are eligible for a three-year tax holiday within the first 10 years of incorporation under Section 80-IAC of the Income Tax Act.
To qualify, they need to be recognized by the DPIIT and should not exceed an annual turnover of ₹100 crores in any financial year.
This benefit helps alleviate financial burden, allowing for greater investment in growth.
Loss carry forward
Carry forward and set off of losses
Section 79 permits startups to retain their losses for a period of eight years, given that at least 51% of the shareholding pattern remains the same as the year when the loss happened.
This is a significant advantage for startups, as many may not be profitable in their early years.
This provision allows them to offset future profits against these losses, effectively reducing taxable income once they become profitable.
Capital gains exemption
Exemption on long-term capital gains
Under Section 54EE, individuals or Hindu Undivided Families can claim exemption on investments made in specified funds up to ₹50 lakhs from long-term capital gains.
This exemption applies when such gains are invested within six months of the transfer of the asset. This is a huge advantage for startup founders or early employees who reinvest their earnings back into eligible funds or startups.
Angel tax relief
Deduction on investments made by individuals in startups
Section 56(2)(viib), commonly referred to as the Angel Tax provision, has been a contentious issue among Indian startups.
However, DPIIT-recognized eligible startups are exempt from this section under specific circumstances.
This exemption encourages angel investments into startups by ensuring that funds received from Indian residents exceeding fair market value are not taxed as income from other sources.
ESOP taxation
Special provisions regarding ESOPs
ESOPs are super crucial for startups to attract and retain talent.
The Finance Act 2020 brought amendments under Section one hundred fifty-six(viib).
Employees of DPIIT-recognized startups can now defer tax payment on ESOPs for a period of five years, or until they exit the company, or until they sell their shares, whichever is earlier.
This significantly reduces the immediate tax liability of employees receiving stock options.