- Tax exemption on a long-term capital gain: Startups are eligible for tax exemption on a long-term capital gain if such a long-term capital gain or a part thereof is invested in a fund notified by the Central Government within a period of six months from the date of transfer of the asset.
New tax rule helps startups avoid paying taxes on profits from selling assets (long-term capital gains). To qualify, startups must invest a portion or all of these profits in a special fund chosen by the central government. If the following conditions are met
● Investment period: The investment must be made within six months of selling the asset.
● Investment limit: The maximum amount you can invest is 50 lakhs rupees.
● Holding period: The money must remain in the fund for at least three years.
● Tax exemption: If you meet these conditions, you won’t have to pay taxes on the long-term capital gain.
Example: Let’s say a startup named “TechInnovations” sells a piece of property for a profit of 70 lakhs rupees. To avoid paying taxes on this profit, TechInnovations can invest 50 lakhs rupees in the government-approved fund within six months of the sale. If TechInnovations keeps the money in the fund for at least three years, it won’t have to pay any taxes on the 50 lakh rupees profit.
- The fair market value: Previously, When investors put money into startups, they sometimes paid more than what the startup was actually worth (above fair market value). This extra amount was subject to tax. Now, The government has changed this rule. If you’re an individual investor, a family member, or a fund that isn’t a venture capital fund, you can invest more than the fair market value in an eligible startup without having to pay taxes on the extra amount. This also applies to investments made by incubators.
Example:
Let’s say a startup called “TechInnovations” is valued at 1 crore rupees. If an investor named “Mr. Patel” believes in TechInnovations’s potential, he might invest 2 crores rupees. In the past, Mr. Patel would have had to pay taxes on the extra 1 crore rupees. But now, thanks to this new rule, he won’t have to pay any taxes on that extra amount.
- Carry forward losses: A startup can carry forward losses from one year to the next to offset future profits. However, there’s a condition: all the shareholders who owned the company on the day the loss occurred must still be shareholders when the loss is carried forward.
Previously, there was a rule that a single shareholder must own at least 51% of the company’s voting rights. This rule has been relaxed for startups, meaning they don’t have to follow this strict ownership requirement.
Example:Imagine a startup called “TechInnovations” that had a loss in 2023. If all the shareholders who owned TechInnovations on December 31, 2023, are still shareholders on December 31, 2024, TechInnovations can carry forward this loss to offset its profits in 2024. And, importantly, TechInnovations doesn’t have to worry about any specific shareholder owning 51% of the company.
- Government Marketplace: The government has created an online platform where startups can showcase and sell their products. This helps startups reach more customers. Example: A startup called “TechInnovations” sells eco-friendly products. They can list their products on the government’s e-marketplace to reach a wider customer base, including government departments and agencies.
- Easier Tenders: Startups participating in government tenders don’t need to have prior experience, a high turnover, or provide security deposits. This makes it easier for startups to win government contracts. Example: TechInnovations might want to bid for a government tender to supply solar panels. Because they are a startup, they don’t need to have years of experience in the solar industry or meet strict financial requirements to participate.
- Tax Benefits for Angel Investors: Angel investors, who are individuals or groups that invest in early-stage startups, get tax breaks. They can invest up to 25 crores rupees in qualifying startups without having to pay a special tax called “angel tax.” Example: An angel investor named “Ms. Sharma” believes in TechInnovations’s potential and invests 15 crores rupees in the company. Due to the angel tax exemption, Ms. Sharma won’t have to pay any extra taxes on this investment.
- Patent and Trademark Filing Discount: Rebate on filing of application: Startups are provided an 80% rebate in filing of patents vis-a-vis other companies bringing down the cost from INR 8,000 to INR 1,600. This helps them cut down on costs in their early years. 50% rebate is also provided in filing of Trademarks vis-a-vis other companies decreasing the cost from INR 10,000 to INR 5,000.
- Reduced Regulatory Burden: The government has made it easier for startups to comply with various laws and regulations. This means startups can spend less time on paperwork and focus more on growing their business. Self-Certification: Startups can declare themselves as compliant with certain labor and environmental laws without needing official checks for 3 to 5 years after they start. Startups in specific industries (listed on the Central Pollution Control Board’s website) don’t need to get special approvals for environmental regulations for the first 3 years.
- Tax Break: If a private limited or LLP incorporated on or after 1st April 2016 can apply for income tax exemption. Startups that receive a government certificate recognizing them as a startup can apply for a tax break. This tax break allows them to avoid paying taxes for 3 consecutive years out of their first 10 years of business. Example: A startup called “TechInnovations” was started on May 2, 2017. After getting recognized as a startup by the government, TechInnovations can apply for a tax break. If approved, they won’t have to pay taxes for any 3 consecutive years between 2017 and 2026.
- Government Investment in Startups: The government has created a fund worth 10,000 crores rupees to help startups grow. This fund is managed by a government organization called SIDBI. The government invests in other funds (called venture funds) that are registered with SEBI (a government body that regulates the stock market). These venture funds then invest twice as much money in startups.