What Are the Tax Exemptions to Startups by Indian Government and Eligibility to Claim?

Tax Exemption for Startups

Startup India Eligibility

The following criteria must be met in order to be considered a startup, according to the Startup India Action Plan:

  • Being incorporated or licenced in India for less than seven years, with a limit of ten years for biotechnology startups. 
  • In each of the previous financial years, annual revenue did not reach Rs 25 crores.
  • Aims to support in the development, introduction, and industrialization of new technologies, systems, or services that are built on intellectual property or technology.
  • The Inter-Ministerial Board, which was formed specifically for this purpose, must first certify it.

Eligible startups are eligible for tax deductions under the Startup India Program

The following tax cuts have been made applicable to qualifying startups:

1. In a seven-year period, there will be a three-year tax holiday

This scheme was open to startups that were established between April 1, 2016, and March 31, 2021. The eligibility period has been extended until March 31, 2022, as part of Budget 2021. Such startups will be liable for a tax refund of 100 percent on profits for three years in a row if their annual revenue does not reach Rs 25 crores in any financial year. This will assist them in meeting their working capital needs during their early years of service.

2. Exemptions from taxes on transactions that are worth more than their fair market value: 

Section 56(2) (viib) allows a corporation (issuer) to sell securities at equal market value if it is not a company in which the public has a significant stake (Fair Market Value). Any consideration gained by the corporation in excess of FMV is subject to taxation as revenue from other sources. Which is often referred to as the “Angel Tax.”

3. After receiving acknowledgment, a startup can apply for Angel Tax Exemption under Section 56 of the Income Tax Act (Angel Tax).

Section 56 of the Income Tax Act establishes eligibility criteria for tax exemption.

The company must be a Department For Promotion Of Industry And Internal Trade approved startup.After the proposed equity problem, if any, the Startup’s total paid-up share capital and share premium does not exceed INR 25 crore.

4. Section 56 exempts you from paying taxes.

Ordinarily, when a corporation receives money by the sale of shares, the surplus capital is payable in the hands of the recipient as Income from Other Sources under the Internal Revenue Code of 1961. In the case of startups, Estimating the Fair Market Value of such shares is difficult when the proposal is in the design or development stages. As a result, FMV is often smaller than the issue value of the capital investment. Section 56(2)(vii) of the Internal Revenue Code introduces the tax.

5. Section 54EE exempts long-term capital gains from taxation.

The Finance Act of 2016 added a new section 54EE to the IT Act. Long-term capital raised by qualifying startups in a fund notified by the Central Government is removed under the sections.The investment must be made within six months of the asset’s transition, with a maximum valuation of Rs. 50 lakhs.The capital must be saved for at least three years.

6. Section 54GB of the Income Tax Act exempts you from paying any fees.

Individuals and Hindu Undivided Funds, will use the capital gain from a residential property to participate in the subscription of shares of qualifying companies under section 54GB. The said deduction is also applicable to qualifying startups under these schemes.

7. Section 80 IAC provides a tax exemption.

This section was introduced in 2017 to exclude startups from having to pay income tax on their earnings. The following conditions must be met in order for this privilege to be granted:

  • The company must be established between April 1, 2016 and April 1, 2021.
  • The total income does not exceed Rs. 25 crores.
  • Just three of the seven assessment years are exempt from the exception.
  • The exemption would be applicable for three years out of ten starting from the year of incorporation.
  • The approved annual turnover would be raised to 100 million.


1. Availability of Credit

The National Credit Guarantee Trust Corporation and the Small Industries Development Bank of India (SIDBI) have proposed a credit guarantee scheme in the budgetary corpus of INR 500 crores per year for the next four years (since 2016) to expand the supply of credit loans for startups.

2. Intellectual Property (IP) Security

Since several startups have significant intellectual property, the scheme offers the following:

  • Patent approvals are processed more quickly.
  • A group of facilitators that help with IP applications.
  • The government pays the facilitator fees on all IP applications.
  • Finally, patent applications are eligible for an 80 percent discount.

3. Production by the government

Startups are exempt from the “previous information” requirements of public contracting or government tenders in the administration sector. There are no exceptions to quality guarantees or technical requirements in order to ensure fair competition and responsible public procurement.

4. Cell for Complaint Resolution

According to a government press release, five members of the Central Board of Direct Taxation (CBDT) founded a dedicated Complaint Cell in August 2019. The cell will deal with tax-related complaints from startups..

5. Opportunities

The scheme offers various opportunities. The nation is currently experiencing a startup boom as a result of that job insecurity and high unemployment. The recession that has accompanied the Covid-19 pandemic will only deepen the condition. In such a scenario, a substantial number of entrepreneurs would choose to start their own enterprises, and such policies would be highly supported by the general population.

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