Tax saving schemes for Startups

Tax Saving Schemes for Startups in India Introduction Starting a new business can be tough, especially when it comes to taxes. To help, the Indian government offers several tax saving schemes for startups. These schemes allow start-ups to save money and grow faster. In this blog, we’ll look at the best tax saving schemes for startups, including the benefits, exemptions, and deductions available in India. What is Tax Saving Scheme? A Tax Saving Scheme is a government-approved plan or policy that helps individuals or businesses reduce their tax liability. For start-ups, these schemes are specially designed to encourage business growth by offering tax exemptions, deductions, or lower tax rates. The main goal is to reduce the financial burden in the early stages of business and support long-term sustainability. What are Tax Saving Schemes for Startups in India Tax saving schemes for start-ups in India are special benefits and exemptions provided by the government to promote entrepreneurship and ease the financial pressure on new businesses. These schemes allow eligible start-ups to pay less tax or delay tax payments during their early growth years. Key schemes include Section 80-IAC exemption, Angel Tax relief, capital gains exemptions, and more; mainly offered under the Start-up India initiative. They help start-ups improve cash flow, reinvest profits, and scale efficiently while remaining compliant with tax laws. Startup India Scheme The Government of India launched the Start-up India Scheme in January 2016 as a flagship initiative to foster innovation, support budding entrepreneurs, and create job opportunities. It offers a wide range of benefits, including tax exemptions, simplified compliance, easier access to funding, and more. The Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry manages the scheme. Key Features and Tax Benefits of Startup India Scheme 1. DPIIT Recognition To access the benefits under the scheme, a start-up must get DPIIT recognition. Eligibility includes: Must be incorporated as a Private Limited Company, LLP, or Partnership Firm. Should not be older than 10 years from the date of incorporation. Annual turnover must not exceed INR 100 crores in any of the previous financial years. Should be working towards innovation, development, or improvement of products or services. Must not have been formed by splitting up or reconstructing an existing business. 2. 100% Tax Exemption under Section 80-IAC Eligible start-ups can claim a 100% income tax exemption for 3 consecutive financial years out of the first ten years since incorporation. To avail of this benefit, the start-up must: Be a DPIIT-recognized entity. Be incorporated between 1st April 2016 and 31st March 2025. File Form 1 with supporting documents through the Income Tax Department’s portal. 3. Easier Compliance and Self-Certification Start-ups can self-certify compliance with 6 labor laws and 3 environmental laws. This reduces regulatory burden and allows them to focus on core business activities. How to Register under Start-up India Scheme? Incorporate your business as a Private Limited Company, LLP, or Partnership Firm. Register on the Start-up India portal www.startupindia.gov.in. Apply for DPIIT recognition with required documents such as incorporation certificate, business pitch, and director details. Once approved, the start-up can avail of all listed benefits, including tax exemptions. We help to register Pvt Ltd Company and Pvt Ltd Annual Filing in India, including name approval, New GST registration, income tax filing, and audits, ensuring full legal compliance. Section 54GB: Capital Gains Exemption Section 54GB of the Income Tax Act, 1961 provides a capital gains tax exemption to individuals or Hindu Undivided Families (HUFs) who sell a residential property (house or plot) and invest the proceeds in an eligible start-up. This section is particularly useful for start-up founders or investors who wish to reinvest their capital gains into innovation-driven ventures. Key Conditions for Claiming Exemption under Section 54GB Type of Asset Sold: The exemption applies when an individual or HUF sells a residential house or plot of land. Investment in Start-up: You must invest the capital gains in equity shares of an eligible start-up (i.e., a DPIIT-recognized company) before the due date of filing the return under Section 139(1). Utilization of Investment by Start-up: The start-up must utilize the amount to purchase new assets (e.g., plant and machinery) within 1 year from the date of investment. Lock-in Period: The start-up must not transfer or sell the equity shares and newly acquired assets for 5 years from the date of purchase. If it violates this condition, it will lose the exemption, and the capital gains will become taxable in the year of violation. Exemption Limit: The exemption applies to the lower of the capital gains or the cost of the new equity shares acquired. Eligible Start-up Criteria To receive investment and offer exemption under this section, the start-up must: Be a DPIIT-recognized entity. Engage in manufacturing or producing articles or services (excluding businesses involving land or real estate). Be incorporated after April 1, 2016, and fulfill other conditions laid out under Section 80-IAC. Angel Tax Exemption under Section 56(2)(viib) Angel Tax is a tax levied on start-ups that issue shares at a price higher than their fair market value (FMV), and the excess is taxed as income under Section 56(2)(viib). To promote start-up funding, the government provides Angel Tax Exemption to DPIIT-recognized start-ups, helping them raise funds without tax implications on share premiums. Key Features of Angel Tax Exemption Applies to shares issued by closely held companies at a premium above FMV. DPIIT recognition is mandatory to claim exemption. No tax on share premium received from resident investors. Paid-up capital and share premium should not exceed ₹25 crores post-issue. Investment from non-residents, AIFs, and VC funds is excluded from the ₹25 crore limit. Exemption helps avoid scrutiny on valuation during funding rounds. Carry Forward and Set-Off of Losses for Start-ups The Income Tax Act, 1961, allows eligible start-ups to carry forward and set off losses incurred during the initial years of business. This provision provides tax relief in future profitable years and eases the financial burden in early growth stages. Key Features Applicable to DPIIT-recognized start-ups under Section 80-IAC. Start-ups can carry forward losses for up to 8 assessment years. Losses must be incurred due to business operations, not speculative or capital losses. Original shareholders must continue to hold shares for continuity. Alternatively, exemption can apply if all shareholders from the year of loss remain unchanged. Helps reduce tax liability in profitable years by adjusting past losses. Conditions to Avail the Benefit The start-up must be DPIIT recognized. The loss should be due to business expenses or operations, not personal or capital investments. The continuity of the shareholding pattern must be maintained as required by the law. Deduction for R&D Expenses To promote innovation and technological advancement, the Indian government allows tax deductions on Research and Development (R&D) expenses under Section 35 of the Income Tax Act. This is a valuable incentive for start-ups investing in product development, scientific research, and innovation. Key Features Applicable to both capital and revenue expenditure incurred on in-house R&D. Start-ups engaged in scientific research can claim this deduction under Section 35(1)(i). Expenditure cannot be for personal use; it must be connected to the assessor's business. Deduction allowed even if the R&D activity does not lead to a successful outcome. Capital assets (excluding land or buildings) used exclusively for R&D are eligible. Types of R&D Deductions In house R&D (Section 35(1)(i) and 35(2)): 100% deduction on revenue and capital expenses related to R&D. Approved Research Associations (Section 35(1)(ii) and 35(1)(iii)): Donations or payments made to approved scientific institutions are eligible for weighted deductions (subject to updates in Finance Acts). What are the Benefits of Incentives? Financial Assistance: Helps start-ups with access to capital and easy loans. Regulatory Ease: Reduces the complexities of compliance, making it easier for start-ups to focus on growth. Support for Innovation: Encourages research, development, and technological innovation with financial aid and other resources. Tax Relief: Several schemes offer tax exemptions or deductions, helping start-ups save on operational costs. What is the importance of Professional Tax Planning? Maximizes Tax Savings: Tax planning helps identify eligible deductions, exemptions, and credits under the Income Tax Act, reducing overall tax liability. By strategically managing business expenses and investments, start-ups can save significantly on taxes. This ensures more funds are available for business growth and expansion. Ensures Legal Compliance: Proper tax planning ensures that a business adheres to all tax regulations, deadlines, and filing requirements. It helps start-ups avoid penalties, fines, or legal disputes with tax authorities. Compliance also boosts the credibility and financial stability of the business. Improves Cash Flow: By minimizing tax outgo, tax planning improves cash flow, allowing businesses to retain more of their earnings. This freed-up capital can be reinvested into critical areas like product development, marketing, and operations. Effective cash flow management is vital for the growth of start-ups. Tax Efficiency for Investments: Tax planning ensures investments are structured to maximize returns while minimizing tax impact. For start-ups, it helps to make the most of exemptions such as capital gains or angel tax benefits. This strategic approach increases the financial sustainability of the business. Avoids Risk of Audit or Litigation: Through professional tax planning, businesses reduce the likelihood of tax audits and legal disputes. Proper documentation, transparent reporting, and accurate filings help avoid scrutiny from tax authorities. Start-ups can operate without the risk of penalties or audits disrupting their growth. Facilitates Long-Term Business Growth: By retaining more profit through tax efficiency, businesses can reinvest in key areas like innovation, hiring, and market expansion. For start-ups, tax planning helps ensure financial stability, enabling sustainable long-term growth. It creates a buffer against unexpected tax liabilities. Optimizes Structure and Costs: Tax planning helps choose the most tax-efficient business structure, whether it’s an LLP, Private Limited Company, or Sole Proprietorship. The right structure can reduce tax liabilities, making the business more competitive. It ensures that the business is compliant while saving on operational costs. Conclusion Tax saving schemes for startups in India offer valuable opportunities to reduce tax liabilities, promote growth, and ensure financial stability. With government-backed schemes such as the Startup India Scheme, Section 54GB exemptions, and Angel Tax Exemption, start-ups can optimize their financial resources and focus on innovation and expansion. By leveraging these tax benefits and adopting effective tax planning, businesses can establish a strong foundation for long-term success and growth. Suggested Read : Startup company registration process How To raise funds for Startup? Company Name Availability for Startups Calculate cost and revenue for a startup Advantages of Startups in India FAQ The Start-up India Scheme provides tax exemptions, easier compliance, and access to funding opportunities, allowing start-ups to focus on growth without worrying about regulatory burdens. Eligible start-ups can claim a 100% tax exemption for 3 consecutive years under Section 80-IAC.To claim Angel Tax Exemption, the start-up must be DPIIT-recognized, and it must issue shares at a premium above fair market value. This exemption helps avoid tax on share premiums received from resident investors, with certain limits on paid-up capital.Section 54GB provides capital gains tax exemptions to individuals or HUFs who sell residential property and reinvest the proceeds in eligible start-ups. This exemption encourages investment in innovation-driven businesses by easing the tax burden on capital gains.Yes, eligible startups under Section 80-IAC can carry forward business losses for up to 8 years. This provision helps reduce tax liability during profitable years, enabling start-ups to offset past losses against future earnings.Tax planning ensures that start-ups identify and claim all eligible exemptions, deductions, and credits. By strategically managing taxes, start-ups can reduce their liability, improve cash flow, and reinvest savings into business growth, creating a solid foundation for future success.