Income tax deductions to claim for your startup

7 min read
Juned Ghanchi

Despite the economic slowdown brought on by COVID-19, startups in India continue to be in the limelight of success. Since 2016, the federal government has set forth a whole bucket of new policies that were inspired by the Startup India campaign, initiated by Prime Minister Narendra Modi. These new policies were aimed to encourage startup entrepreneurship with the help of income tax deductions and other financial initiatives.

These new income tax deductions are irrespective of political parties in government and corridors of power. But more importantly, they help business startups survive and grow.

The GDP growth rate of the Indian economy in 2020 hit below 8% due to the pandemic, but has since risen to 12.6% in 2021.

Whether you’re planning on opening a business or already own a startup, you could be eligible to take advantage of these favorable income tax exemptions.

Below, we’ll explain each in detail to see if you can save money on your income tax spending.

4 benefits offered to startups under the current income tax act

Indian administration is embracing a variety of proactive steps to boost the morale of startups through a variety of tax exemptions and other financial aids.

However, new Indian startups can be optimistic about the multitude of benefits they get from income tax authorities when it comes to income tax deductions. Here are the key benefits for startups under the current Income Tax Act.

1. Relaxation for startups undergoing financial losses

Man writing in a notebook at a desk

The first income tax deduction is timely, given the stresses COVID-19 has placed on small businesses.

Section 79 of the Income Tax Act creates clear provisions to carry forward losses for companies with great future potential. It was initiated to help small businesses survive and get going.

The provisions under this section are relaxed to a great extent for all eligible startups.

Current eligible startups can carry forward and set off their losses by putting the amount against revenue from the previous financial year.

There are only two conditions to avail this relaxation:

  • The company's continuous holding of a 51% share
  • Continuous presence of all the original shareholders within the company

In the past, there have been too many instances where small startups have made a big turnaround from systematic and well-disciplined moves. Some have even had a little relaxation from authorities.

The present relaxation offered to Indian startups is a nice example of how government measures can play a pivotal role in reviving the economy.

By having startups carry forward their losses with more provisions, the government is ensuring they do not abuse the system for their personal gains.

2. Tax exemption for angel investors

In the present Finance Act, a new income tax regulation under section 56(2)(viib) helps prevent the flow and growth of unaccounted wealth or wealth not directly measured by the government.

Man sipping tea while looking at a laptop

The new tax exemption provided to angel investors, or individuals that invest capital in new or small businesses, shows how the government wants to control unaccounted wealth. The new regulations are likely to bring this unaccounted wealth more within government control, while giving a boost to all startups.

Any startup can avail from these benefits by giving a specific declaration mentioned in Form 2. They’ll also need to provide full details of the new company, such as:

  • Brand name
  • Date of inception
  • Registration number
  • Contact information

Here are a few conditions that startups in this category need to fulfill:

Register with the Department for Promotion of Industry (DPIIT)

The startup must be duly registered with the Department for Promotion of Industry (DPIIT). If you haven’t done so yet, visit their registration page to fill in the details of your company.

Check your maximum capital and net worth value

When applying for this exemption, the total value of your company's paid-up share capital and share premium should not cross the Rs. 25 crore limit. The only categories of shareholders who are excluded from this limit are:

  • Non-residential Indians
  • Venture capital companies
  • Venture capital funds
  • Listed companies with a net worth of 100 crores and beyond

Avoid investing in listed assets for seven years

Angel investors applying for this tax exemption should not invest in the following assets for seven years:

  • Land or real estate properties
  • Financial loans
  • Capital investments of various natures
  • Shares and securities
  • A few listed valuables

It’s important to note that the seven-year period starts from the completion of the financial year of premium tax issuance.

3. Income tax deduction under section 80-IAC

This income tax deduction, under section 80-IAC, applies to all profits earned by an eligible startup.

The deduction is available for three consecutive years and you’ll need to file Form 1, along with any other required documents. From there, you should be sent to the Inter-Ministerial Board of Certification.

Key conditions for this deduction include the following:

  • Registration: You should be registered at the time of inception as a private limited company, public limited company or an LLP.
  • Inception age: Your company should’ve been established before or after 1st April 2016 and before 1st April 2021.
  • Turnover volume: The gross turnover should not cross the limit of Rs. 25 Crores during all financial years subject to the tax deduction claim.
  • Certification: The business should be fully certified and eligible, with approval from the Inter-Ministerial Board of Certification.
  • Innovation standards: Your company should be engaged in innovative solutions with great potential of generating consistent revenue and wealth.

Currency on table with ledger and pen

4. Tax exemption under 54GB

This is a tax exemption originally meant for protecting the interest of shareholders making the investment in eligible startups. It is only applicable to an individual equity investor or a Hindu Undivided Family (HUF) investing in the company for long-term gains.

Understanding the eligibility

The government-assured tax exemption is a committed gesture to small business growth.

However, a complete 100% tax deduction does not apply to all startups.

Only eligible ones can expect these tax benefits, which is why it is vital to know the eligibility criteria.

Below, we’ve listed the eligibility criteria for reference:

  • Inception age: Startup businesses should be less than 10 years of age since inception. To be more precise, the Finance Act 2018 says that the company should come into existence between 1st April 2016 and 1st April 2021.
  • Turnover volume: The turnover volume of the business should be well within Rs 100 Crores.
  • Certification: The business must obtain an Inter-Ministerial Board of Certification. This certification requires businesses to contribute to the development, implementation and commercial marketing of innovative products. It also states that they should contribute to the unique processes, services and solutions based on the latest technologies.

The above criteria is meant to endorse promising and innovative startups across diverse business niches.

Note: Companies formed by splitting or restructuring old businesses are not eligible for the government-assured tax exemption.

These income tax deductions could save your business

Indian startups continue to play a vital role in the revival of the economy. They also pave a path towards growth and financial stability. Naturally, all governments — irrespective of political divides and economic visions — hold startups in high esteem.

These income tax exemptions and relaxation efforts stimulate the Indian economy under a revised financial package.

They’re made to help startup companies move ahead and find a stable footing in a highly competitive world.

The information contained in this blog post is provided for informational purposes only, and should not be construed as an endorsement or advice from GoDaddy on any subject matter.