India is a young nation. With over half of its population below the age of 25 and more than 65% below the age of 35(1), the country is likely to have one of the largest workforces in the world. These demographics and the boost of the entrepreneurship in India, has given a rise to the startup culture that was even recognized by Prime Minister Narendra Modi. His government promoted the Startup India campaign in 2016 to boost entrepreneurship in India and thus, laid certain grant of various tax exemptions for the newly formed businesses.
So, with the financial year that has ended and tax season around the corner, deadline for filing Income Tax Return (ITR) being July 31, it’s time to know the basics and benefits when filing for taxation–
1.Register your company
If you are a startup that’s just got into the business, the first and the most important thing you should do is register your company. The Government of India has simplified the process by making it online and all companies require to do is-
- Fill up the form
- Upload the required documents
The registration can be done on the Startup India website or through the mobile app.
Every business, irrespective of its size is required to record all transactions of the company. It should also have copies of bills that act as proof of the financial statement. Accurate bookkeeping is a vital process of early tax planning as it helps to keep a track of revenue and outgoings. In case of records not maintained properly, the businesses can suffer from large fines and penalties which could lead to termination of your business.
3. Three-year Tax holiday
After the basics are done, let’s come to the good news. Under the Startup India campaign, eligible startups can enjoy 100% tax exemption for a period of 3 years on meeting the below entitlement criteria-
- Incorporated after April 1, 2016, and before 1st April 2019
- Annual turnover does not exceed Rs 25 crores in any financial year
- Holds a Startup Certificate from the Inter-Ministerial Board (IMB) of Certification
The startups can claim the benefit under Section 80IAC.
4.Abolition of angel investment tax
For any growing business, investments are significant sources of funding. But, in their initial stage, being financed by venture capitalists or taking loans from banks becomes a challenge. Therefore, angel investors play an important role in the investments process of startups. Therefore, the government in its initiative to help startups grow has taken away the angel investment tax. In simple words, it means that angel investors who are friends or family members and not registered as Venture Capitalist funds will not be taxed.
This new policy is under the amendment of Section 56(2) (vii) (b) of Income Tax Act, that gives liberty to issue shares to the investors at a higher rate than the fair value without any hassles of taxation.
5.Funds of Funds
In order to boost up their startup, the government has provided another advantage of setting up a fund with an initial corpus of INR 2,500 crores and a total corpus of INR 10,000 crores over a period of four years. This fund will act as the “Funds of Funds (FOF)” and will be applicable to the eligible startups registered under DIPP. The funds will not be directly invested in start-ups but under only the direction of SEBI registered venture funds.
6.Exemption on capital gain tax
If a company has shares in the market and have raised capital or funds from stock sharing, then the profit earned by these ways are termed as capital gains and thus come under the tax provisions. But, Section 55 EE in the Income Tax Act now certifies eligible startup to claim tax exemptions of 20% of capital gain tax. This long-term capital gain to entrepreneurs provides a tax exemption for getting a profit from selling the capital assets like stock, bonds, shares, etc. This exemption is subject to a limit of Rs. 50 Lakhs only.
However, as a prerequisite, such amount should be invested in the specified fund for a minimum period of three years. Also, if the fund is withdrawn any time before that, the exemption will not be applicable.
Know the basics now, so file the ITR and make the most of the benefits provided by the Government of India.