The Startup Initiative by the Government of India has been one of the most successful attempts to create a platform for growth and development of Startups and their entrepreneurs. Startups, as we all know, is the force that is fueling the Indian economy today. By creating an initiative like this, the Modi government is doing a great job to bring together startups to form networks and communities.
In an attempt to speed the process of development via the startup india initiative, PM Modi and team have planned to promote financial help via banks for startups and have also decided to make the incorporation of startups an easier process. Apart from this, they have also granted various tax exemptions and other schemes and systems that will benefit startups (We will delve into these benefits in more detail through the course of this blog)
But, there is a catch. All of the above benefits and schemes will only be made available to certain companies that fit into the eligibility criteria that has been set by the government. Therefore, if you are a startup that would love to benefit from the schemes of the startup india program, it is very important to first decipher whether you make the cut!
How do I know if my startup is eligible?
If your startup meets the following conditions, it is eligible to claim all benefits given by the government. They are as follows:
- Your company must be incorporated or registered in India for a time period of less than 7 years. On the other hand, if you are a biotechnology startup, then the time period increases up to 10 years from the date of incorporation.
- The annual turnover of your company should not be more than Rs 25 crores in your current financial year or the ones before that.
- The focus of your company should be on development, innovation as well as commercialization of new products and services that are driven by technology or intellectual property.
- Your company should not be formed by the splitting up or the reconstruction of a business that is already in existence.
- You have to obtain a Certification from the Inter-Ministerial Board setup.
- Your company must be incorporated as a private limited company, a registered partnership firm or a limited liability partnership.
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What do I get if I am eligible under this program?
- You are Exempted to pay tax for 3 years:
Yes, you read that right. If your startup is incorporated after April 1, 2016, you are eligible for getting a 100% tax rebate on the profit that you make for a period of three years in a block of seven years. Now this is will be made available to you only if your annual turnover does not go above Rs 25 crores in a year.
- Tax Exemption on Long Term Capital gains:
The Income Tax Act has now included a new section that says that eligible startups are exempted to pay tax on long-term capital gains only and only if the long-term capital gain or a part of it is invested in a fund that is notified and verified by the Central Government within a period of six months from the date of transfer of the asset. You are only allowed to invest a maximum of Rs 50 lakh in your long term gain. This amount of money should be invested in the fund for a period of 3 years and if withdrawn before that, the exemption will be revoked.
- Tax exemption on investments:
The government has exempted the tax being levied on investments above the fair market value in eligible startups. For eg: If someone invests in your company, they will not have to pay tax for the same. These investments include those made by resident angel investors, family members that are not venture capitalists or belong to a venture capitalist fund. The same goes for investments made by incubators and they are exempted as well.
- Tax Exemption on Long Term Capital Gain to Individual/HUF on investment in equity shares of “Eligible Startups”:
In an attempt to grow the business of startups, the government has made amendments in section 54GB which now allows exemption of tax on long-term capital gains, if they are invested in startups that are eligible for the Startup India Initiative.
Thus, if an individual or HUF sells a long term capital asset and invests the capital gain to buy 50% or more of equity shares of eligible startups, then tax on that long term capital gain will be exempted. The lock-in period for these equity shares is 5 years and the startup needs to invest in capital assets and these assets cannot be sold or transferred for next 5 years from the date of acquisition of assets.
We hope that by this blog, we were able to quickly communicate to you information about whether your startup is eligible to avail the benefits of the startup India program. We also hope that we also gave you an insight into the various tax benefits that you can get once you qualify to be a part of this scheme.
If you have any other queries regarding this topic or if you just want someone to handle it for you, please feel free to reach out to us on pinkesh@savagepalmer.com and we would be happy to help you out!
