Tax saving schemes for Startups: Everything you need to know

Introduction

Everyone loves tax-saving advice because no one wants to miss out on taking advantage of tax savings that are allowed by law. Since start-up businesses can make a big contribution to India’s economy, the government constantly works to give them tax perks. Here in this article we will walk you through the Eligibility Criteria for Tax Exemption for Startups, Income Tax rules for Startups, and Tax Saving Schemes for Startups.

Income Tax rules for Startups

The fiscal year 2016-17 budget was the first time that tax breaks for new businesses were considered and rules were established for them. Start-ups now enjoy many tax benefits under the Income Tax Act of 1961, thanks to subsequent changes in tax exemption rules in the following financial year.

The most important consideration is that tax on startups is levied on profits earned rather than total sales, which is a huge benefit because they are used to cover the initial operational costs of establishing the company. The expenses incurred and the depreciation value are deducted from the total sales revenue earned to calculate the startup’s profit or earning. This allows for the reimbursement of any costs incurred as a result of asset depreciation, purchase costs, and other expenses. The amount thus derived represents the total profit and is subject to taxation.

Another encouraging government initiative is the Presumptive Scheme of Taxation, which is only applicable to sole proprietorship firms or HUFs. This scheme allows the company to calculate income on a percentage basis in one of two ways:

• 50% of the total value of services rendered, OR
• 8% of the total sales made by the company

Eligibility Criteria for Tax Exemption for Startups

Below is the Eligibility Criteria for Tax Exemption for Startups:

• The startup should be registered as a Partnership Firm or a Limited Liability Partnership, or as a private limited company.
• Turnover should have been less than INR 100 crores in any of the previous fiscal years.
• For the first ten years after incorporation, an entity is considered a startup.
• The Startup should be focused on product innovation/improving existing products, services, and processes, and it should have the potential to generate employment/wealth. A “Startup” is not an entity formed by the division or reconstitution of an existing business.

4 Prime Tax benefits for Startups

• The first three years are tax-free

For the first three years, the government of India exempts start-ups from paying any taxes. This gives new entrepreneurs time to build a business with extra funds that they would otherwise have to pay as taxes. Only companies registered with the Department of Industrial Policy and Promotion (DIPP) are eligible to receive this benefit. Furthermore, the start-up must be a company that works in the field of intellectual property and promotes innovation and development of related services and products. The only tax that the startup must pay is the Minimum Alternate Tax (MAT), which is calculated on the revenue reflected in the company’s ‘book profit’.

• Presumptive tax advantage

A start-up with a turnover of less than INR 2 crore is eligible for the ‘Presumptive Tax Scheme.’ The company is not required to keep a book of accounts under this, which relieves entrepreneurs of the burden.

• Capital gain tax exemption of 20%

If you are an entrepreneur wondering how to reduce tax in India, you will be relieved to know that the government provides capital gain tax benefits. The capital gain tax is the income tax that corporations must pay on profits earned from company stock. Even though earnings from stocks, shares, and bonds are taxable, start-ups receive a 20% tax break on capital gains.

• There is no tax on Angel Investment

Because they have no track record, start-ups frequently fail to earn the trust of new investors, making it difficult for them to raise funds. New entrepreneurs cannot grow their businesses without significant investments. In such a case, angel investors can assist them. They negotiate the terms and interest rates that the entrepreneurs must pay. The Indian government has declared that ‘angel investments’ are tax-free. As a result, start-ups can now raise funds from angel investors without fear of additional taxation. If you are considering how to save tax in a partnership firm more effectively and use the investment to further the company’s development, keep this in mind.

Tax saving schemes for Startups

• Long-term capital gains are exempt from taxation.

A new section 54 EE has been added to the Income Tax Act to allow eligible startups to avoid paying tax on long-term capital gains if the gain, or a portion of it, is invested in a fund notified by the Central Government within six months of the asset’s transfer.

The maximum investment amount in the specified long-term asset is INR 50 lakh. This amount must be invested in the specified fund for a period of three years. If money is withdrawn before three years, the exemption is revoked in the year the money is withdrawn.

• Individuals and HUFs are exempt from paying tax on long-term capital gains invested in equity shares of Eligible Startups under Section 54GB.

Existing provisions in Section 54GB exempt long-term capital gains from taxation on the sale of a residential property if such gains are invested in small or medium enterprises as defined by the MSME Act, 2006. However, this section has been updated to include an exemption for capital gains invested in eligible start-ups.

As a result, if an individual or HUF (Hindu Undivided Family) sells a residential property and invests the capital gains in 50% or more of the equity shares of an eligible startup, the tax on long-term capital is avoided as long as the shares are not sold or transferred within 5 years of their acquisition.

Startups must also use the funds invested to purchase assets and must not transfer assets purchased within 5 years of purchase. This exemption will increase investment in eligible startups while also encouraging their growth and expansion.

• Allowance for carry forward losses and capital gains in the event of a change in shareholding pattern.

Losses in respect of eligible start-ups may be carried forward if all shareholders of such company who held voting shares on the last day of the year in which the loss was incurred continue to hold shares on the last day of the previous year in which such loss is to be carried forward. In the case of eligible startups, the restriction of holding 51% of voting rights to be unchanged under section 79 has been relaxed.

Conclusion

Startups tax planning becomes easier with these tax breaks. It leaves them with more funds to innovate and develop newer ideas. The government’s goal is to assist start-ups in developing self-sustaining businesses.