Startup Filing and Tax Exemption: How to File Annual Returns and Get Tax Benefits in India?
Introduction
Startup filing and tax exemption involve the key steps and documents needed to legally start and run a new business. You must complete and submit certain important documents before registering your business. Companies must also pay required taxes, and missing deadlines can lead to penalties. This article clearly explains everything you need to know about startup filing and tax exemption in a simple, step-by-step way.
What do we understand by a Startup Filing?
Startup Filing involves completing the legal and regulatory paperwork needed to officially start and run a new business. It includes tasks like registering for tax identification numbers, submitting tax forms, and following tax compliance rules. Proper startup filing helps a business meet tax obligations, avoid legal problems, and build a solid base for growth. Managing startup taxes from the beginning is key to staying financially healthy and legally compliant.
What are the essentials to be filled for a startup company?
1. Income Tax Returns (ITR)
An Income Tax Return (ITR) is a formal document that taxpayers use to report their income, expenses, and other financial details to the tax authorities. It serves as a declaration of an individual’s or business’s financial activity over a specific period, typically a financial year. By filing an ITR, taxpayers calculate their tax liability, claim eligible deductions and exemptions, and ensure compliance with tax laws.
Major forms to be filed for (ITR):
- ITR-3 for individual/partnership firms (proprietorship)
- ITR-5 for LLPs
- ITR-6 for (private limited, one-person company)
2. GST Returns
GST returns are periodic documents that businesses registered under the Goods and Services Tax (GST) must file to report their sales, purchases, tax collected, and tax paid. These returns provide a comprehensive summary of a business’s GST transactions, including input tax credits claimed and output tax liability.
Major forms to be filed for GST Returns
- GSTR-1: Monthly or Quarterly return for outward supplies
- GSTR-3B: Monthly return for summary of inward and outward supplies and payment of tax
- GSTR-9: Annual return
- MCA Annual Returns
MCA Annual Returns refer to the mandatory filings that companies and Limited Liability Partnerships (LLPs) must submit annually to the Ministry of Corporate Affairs (MCA) in India. These returns include critical information about the company’s financial performance, management, and operational status. For companies, this involves filing forms such as AOC-4 for financial statements and MGT-7 for the annual return.
Major forms to be filed for MCA Annual Returns:
- AOC-4
- MGT-7
- Form 8
- Form 11
3. TDS Returns
A TDS return is a regular report that a taxpayer submits to the Income Tax Department. It shows the tax deducted at source (TDS) from payments like salaries, interest, rent, and professional fees. The return includes the total TDS deducted, the amount deposited with the government, and the details of each deduction.
Major forms to be filed for TDS Returns
- Form 24Q
- Form 26Q
4. Director’s Report
A Director’s Report is a formal document the board of directors prepares to give a clear summary of the company’s performance and major events during the financial year. It usually includes details about financial results, business operations, strategic goals, and future plans.
5. ROC Filing
ROC filing refers to the submission of various documents and forms to the Registrar of Companies (ROC) in India. These filings are mandatory for companies and Limited Liability Partnerships (LLPs) to comply with the Companies Act, 2013. ROC filings include annual returns, financial statements, changes in company details and requirements.
6. Tax Audit Report
A Tax Audit Report is an official document prepared by a qualified auditor that assesses and verifies a company’s financial statements and tax records. It provides a detailed examination of the company’s compliance with tax laws, including the accuracy of income, deductions, and tax liabilities.
We provide filing services for startups, including Pvt Ltd ROC filing, LLP annual return filing and OPC compliances ensuring timely submission of financial statements and returns to keep your company compliant.
Key Pointers to be remembered:
1. Penalties for Non-Compliance
Penalties for non-compliance refer to the financial or legal consequences imposed on individuals or entities that fail to adhere to regulatory, tax, or legal requirements. These penalties can arise from missed deadlines, incorrect filings, or failure to meet statutory obligations. Common penalties include fines, interest on overdue payments, additional surcharges, and legal action. Non-compliance can also lead to reputational damage, operational disruptions, and restrictions on business activities.
2. Use of Professional Services
The use of professional services involves engaging experts such as accountants, auditors, lawyers, and consultants to handle complex tasks and ensure compliance with legal and regulatory requirements. These professionals provide specialized knowledge and skills that can be critical for managing financial statements, navigating tax laws, handling legal matters, and implementing business strategies.
3. Startup Tax Exemption in India
The term “startup exemptions” in India refers to a variety of tax breaks and regulatory relief that are available to qualified startups. These breaks are a part of the government’s larger initiative to promote innovation and assist in the establishment of new businesses. The main goal of these breaks is to lessen the financial and operational obstacles that startups, particularly those in their early stages, must overcome.
What are the Tax Exemptions for Startups?
1. A 3-Year tax Holiday
The government offers a 3 year tax holiday to eligible startups. This means they don’t have to pay income tax on their profits for any three consecutive years within the first ten years after starting the business. Under Section 80 IAC of the Indian Income Tax Act, this benefit helps reduce financial pressure so startups can reinvest their profits to grow and innovate.
2. Long-Term Capital Gains Exemption
Long-Term Capital Gains (LTCG) Exemption is a tax benefit that allows taxpayers to avoid or reduce the tax liability on profits earned from the sale of long-term assets, such as property, stocks, or other investments, held for a specified period.
3. Investments Above FMV
Investments Above Fair Market Value (FMV) refer to situations where a startup receives funding from investors at a valuation higher than the company’s FMV, commonly resulting in what is known as “Angel Tax.” In India, under Section 56(2)(viib) of the Income Tax Act, such investments are typically subject to tax.
4. Tax Exemption Under Section 54GB
Under Section 54GB of the Income Tax Act, 1961, individuals and Hindu Undivided Families (HUFs) can get a tax exemption on long-term capital gains from selling a residential property. To qualify, they must reinvest the money in eligible startups by buying equity shares. The startup must then use these funds to buy new assets or equipment.
5. Allowance to Set Off Carry forward Losses
The allowance to set off carry forward losses is a key benefit in startup taxes, enabling startups to offset their current profits against losses incurred in previous years. Under this provision, startups can carry forward losses for up to eight years, provided they meet specific conditions, such as maintaining a consistent ownership structure.
This tax benefit helps startups manage their tax liabilities more effectively, ensuring that early-stage losses do not hinder future profitability. It is particularly valuable for startups navigating the financial challenges of their initial years, as it allows them to reduce taxable income when they begin to generate profits.
Conclusion
Startup filing and tax exemption in India require startups to understand compliance requirements and available tax benefits. By actively filing annual returns and claiming eligible exemptions, startups can avoid legal issues and gain valuable financial advantages. Staying informed and organized in handling these processes is key to ensuring long term growth and success.
Suggested Read :
Tax Saving Schemes for Startups
Advantages of Startups in India
Startup Scheme for Women Entrepreneurs
Virtual CFO Services for a Startups
FAQ
1. What is the eligibility criteria for a startup to get recognized under the Startup India scheme?
To be recognized under the Startup India scheme, an entity must be registered as a Private Limited Company, LLP, or Partnership Firm, be less than 10 years old from the date of incorporation, have an annual turnover not exceeding ₹100 crore, and be working towards innovation or improvement of products, services, or processes; it must not have been formed by splitting or reconstructing an existing business.
2. How can a startup apply for income tax exemption under Section 80-IAC?
A DPIIT-recognized startup can apply for income tax exemption under Section 80-IAC by filing Form 1 through the Income Tax portal and getting approval from the Inter-Ministerial Board; the exemption allows 100% tax relief on profits for any three consecutive years out of the first ten years since incorporation.
3. Is GST registration mandatory for startups in India?
GST registration is mandatory for startups if their annual turnover exceeds ₹40 lakh (₹20 lakh for special category states), if they engage in inter-state supply of goods or services, or if they sell through e-commerce platforms, though startups below the threshold limit without such obligations may operate without registering initially.
4. What are the compliance requirements after startup registration?
After registration, startups must comply with annual ROC filings, maintain proper accounting records, file GST and TDS returns if applicable, adhere to labor law requirements like EPF and ESIC when hiring, and ensure timely payment of taxes and statutory dues to remain compliant.
5. Can a startup avail both 80-IAC tax exemption and angel tax exemption (Section 56(2)(viib)?
Yes, a startup can avail both exemptions separately; Section 80-IAC provides a tax holiday on profits, while the angel tax exemption under Section 56(2)(viib) protects DPIIT-recognized startups from taxation on investments above fair market value, subject to submission of relevant declarations and compliance with prescribed norms.
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