Startup scheme is an initiative taken by the Government of India and its main aim is to promote new entrepreneurs, employment generation, and creation of wealth. This Startup ecosystem generally covers the network of interactions between people, organizations, and their environment. These interactions help to not only create new potential startups but also strengthen the already existing ones.
However the companies that get recognition certificate of Startup from DPIIT are eligible to certain types of benefits, amongst which tax exemption and incentives is the major benefit.
Tax exemption and incentives
Tax exemptions are allowed only to startups that are eligible under startup India programme:
Income tax exemption for a period of 3 consecutive years : Under section 80 IAC of the Income Tax Act post getting the clearance for tax exemption, The Startups that are incorporated after April, 2016 are eligible for getting tax rebate up to 100% on the profits earned by them for a period of three consecutive years in a block of & years. However, it should be noted that such an entity shall have not exceeded the turnover limit of 25 crores in any financial year.
Tax exemption on capital gains : Section 54EE of the Income Tax Act, provides tax exemption to startups. This exemption is related to the tax on long-term capital gain if any startup occurs any LTCG and if such LTCG or its part thereof is invested in a Central Government notified fund within a period 6 months from the date of transfer of such an asset. Maximum amount for investment in such asset is Rs. 50lakhs and that amount shall remain invested for a continuous period of 3 years, if these 2 conditions aren’t complied with then exemption can be revoked by the authority.
Tax exemption on investments above fair market value : For eligible start-ups, government has exempted the tax being levied on investments above the fair market value. Such investments can be of various types like: by angel investors, venture capitalists, funds by family or friends, investments made by incubators above fair market value etc.
Tax exemption to individual/HUF on investment of long-term capital gain in equity shares of eligible startups U/S 54GB : Under Section 54GB of the Income Tax Act, the government allows exemption with regard to the tax occurred on Long term capital gain on the sale of any residential property, provided such gains are invested in any MSME enterprise defined under Micro, Small and Medium Enterprises Act, 2006 and eligible startups also. Therefore, in any case where an individual or HUF sells a residential property and invests the capital gains to subscribe the 50% or more equity shares of the eligible startups, then tax on long term capital will be exempt provided that such shares are not sold or transferred within 5 years from the date of its acquisition/purchase.
Set off carry forward losses and capital gains allowed in case of a change in shareholding pattern : The set off and carry forward of losses is allowed only in respect of eligible startups where are the shareholders of that eligible startup hold such shares from the day where the last day of the year in which the loss was incurred up to the last day of previous year in which such loss is to be carry forward.
This above mentioned exemptions will boost the investment in eligible startups and will promote their growth and expansion.
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