Startup India Campaign: Definition, Eligibility & Tax Exemptions

The Startup India campaign, an initiative of the Government of India was first announced on August 15, 2015, by Prime Minister Narendra Modi during his Independence Day speech.

The event was, then, inaugurated on January 16, 2016, by the former Finance Minister of India, the Late Arun Jaitley. Venture Capitalists, Startup Founders, and CEOs of various companies were recorded to attend the event.

The action plan of this initiative primarily focused on three areas –

• Simplification and Handholding
• Funding Support and Incentives
• Industry-Academia Partnership and Incubation

Another primary action area of this initiative was to discard restrictive State Government policies applicable to this domain like License Raj, Land Permissions, Foreign Investment Proposals, and Environmental Clearances.  This was organized by The Department for Promotion of Industry and Internal Trade (DPI&IT).

What is a Startup?
Eligibility for Startup India Campaign
Tax Exemptions Allowed Under Startup India Campaign

What is a Startup?

The Indian government defines a startup as an entity that is headquartered in India, has been operating for less than 10 years, and has an annual turnover of less than INR 100 crore (USD 13 million). The Indian government’s I-MADE program, under the Startup India initiative, aims to help Indian entrepreneurs build 10 lakh mobile app startups.  

The second program is the Pradhan Mantri Mudra Yojana (MUDRA Bank’s Scheme) which aims to provide micro-finance and low-interest rate loans to business owners from low socio-economic backgrounds. In the year 2020, an initial capital of INR 20,000 crore (USD 3.0 billion) was allocated for this scheme.

Eligibility for Startup India Campaign

To be recognized as a startup under the Startup India action plan, a company must fulfill certain conditions –

• Should be less than 10 years from the date of registration/incorporation.
• Should be registered as a Private Limited Company, a Partnership Firm, or a Limited Liability Partnership.
• Should have an annual turnover not exceeding INR 100 crore for any financial year since incorporation/registration.
• Should be working towards innovation, development, or improvement of products, processes, or services.
• Should be a scalable business with a high potential for employment generation or wealth creation.
• Should not be formed by splitting up or reconstructing a business already in existence.

Tax Exemptions Allowed Under Startup India Campaign

To promote the growth of startups within the country, the Indian government has extended the following tax exemptions for eligible startups.

Three-Year Tax Holiday in a Block of Seven Years

All the startups that have been incorporated between April 1, 2016, and March 31, 2021, are eligible within this scheme which was extended to 31st March 2022 in the Budget of 2021. These startups will be eligible to receive a 100% tax rebate on profits for a period of three years in a block of seven years.

The condition for receiving this benefit is that the annual turnover of the company should not exceed INR 25 crore in any financial year. The aim of this scheme is to help startups to meet their working capital requirements in the initial years of operation.

Tax Exemption on Long-Term Capital Gains

The Income Tax Act’s new section 54 EE specifies that the eligible startups will be exempt from taxes from long-term capital gains if such a long-term capital gain or a part of it is invested in a fund nominated by the central government within six months from the date of transfer of the asset.

INR 50 lakh is the maximum amount that can be invested in the long-term specified asset for a specific period of 3 years. In the event the amount is withdrawn before the time frame of 3 years, the exemption will be revoked in the year that the money has been withdrawn.

Tax Exemption on Investments Above the Fair Market Value

Eligible startups are exempted from the tax levied on investments above their fair market value. These investments include investments made by resident angel investors, family, or funds that are not registered as venture capital funds.  Investments made by incubators above fair market value are also exempt from this tax.

Tax Exemption to Individual / Huf on Investment of Long-Term Capital Gain in Equity Shares of Eligible Startups U/S 54 GB

Section 54 GB allows tax exemption from long-term capital gains on the sale of residential property in case these gains are invested in small or medium enterprises as defined under the Micro, Small, and Medium Enterprises Act, 2006.

However, this section has now been amended to include tax exemption on long-term capital gains if the money is invested in eligible startups and such shares are not sold or transferred within 5 years from the date of its acquisition. This exemption helps in boosting investments in startups and promotes their growth and expansion.

Set Off of Carry Forward Losses and Capital Gains Allowed in Case of a Change in the Shareholding Pattern

The government has relaxed the restriction of holding 51% of voting rights under section 79 in the case of eligible startups. The carry forward of losses is allowed if all the shareholders carrying voting power held the shares on the last day of the year in which the loss was incurred continue to hold the shares on the last day of the previous year in which the loss is to be carried forward.

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Conclusion

The Startup India Campaign announced by the Indian Government has also received considerable push and support through policy changes and introducing schemes that ensure the growth and expansion of startups. These tax benefits that are available to eligible startups provide encouragement to new business ideas and promote the economy of the country.

FAQs

What is the benefit of a Startup India Certificate?

The startup India certificate is proof of a startup being recognized by DPIIT. It has multiple advantages such as tax benefits, easier compliance, IPR fast-tracking, etc.

What is the tax exemption for startups?

Under section 80-IAC, startups founded after April 2016 are eligible for a 100% tax rebate on making a profit for three years in a block of seven consecutive year period. Given the condition, their turnover should not exceed more than 25 crores in any financial year from the deduction claimed.

What is the benefit of the startup India initiative?

Some of the common benefits of startup India initiatives are relaxed norms, tax exemption, access to funding, cheap patent cost, easier compliance, IPR fast-tracking, etc.  

How to get funds from the government for startup businesses in India?

The Indian government has enabled a number of schemes for startups. In order to get funds from them through the government, one needs to apply tp the respective online portal and get registered as required on the website.