A Guide for Registered Startups


The Startup India Initiative is a flagship program launched by the Government of India in January 2016. It aims to foster entrepreneurship and promote the growth of startups in the country. The initiative focuses on creating a supportive ecosystem for startups, simplifying regulations, and providing various benefits and incentives to encourage innovation and job creation. Here is an overview of the Startup India Initiative and its benefits:

  1. Simplified Startup Process: The initiative has simplified the process of starting a business in India. It provides a single-point registration process through an online portal, reducing the time and effort required to register a startup.
  2. Tax Exemptions: Startups registered under the Startup India Initiative are eligible for various tax benefits. They can avail of a three-year tax holiday, where they are exempt from paying income tax for the first three years of their existence. Additionally, the capital gains tax on investments in eligible startups has been exempted.
  3. Intellectual Property Rights (IPR) Protection: The initiative facilitates the protection of intellectual property rights for startups. It provides fast-track examination and lower fees for filing patents, trademarks, and designs. This helps startups secure their innovative ideas and technologies.
  4. Funding Support: The initiative aims to increase the availability of funding for startups. It establishes a Fund of Funds with a corpus of INR 10,000 crores (approximately $1.5 billion) to support venture capital funds that invest in startups. This helps startups access the necessary capital for their growth and expansion.
  5. Incubation and Mentorship: The initiative promotes the establishment of incubation centers and provides mentorship support to startups. These centers offer various resources, infrastructure, and mentoring programs to nurture and guide startups during their early stages.
  6. Industry-Academia Partnership: The initiative encourages collaboration between startups and academic institutions. It facilitates the creation of innovation centers, incubators, and research parks within academic institutions to foster entrepreneurship and promote research-driven startups.
  7. Government Procurement Support: Startups are given preference in government procurement processes. They can participate in government tenders, and certain relaxations are provided in terms of prior experience, turnover, and earnest money deposit requirements.
  8. Easier Winding up of Business: The initiative has introduced provisions to simplify the process of closing down a business. It allows startups to close their operations within 90 days through a fast-track process, reducing the time and cost involved in the winding-up process.

The Startup India Initiative has played a significant role in creating a conducive environment for startups in India. It has helped in fostering entrepreneurship, attracting investments, and promoting innovation. The benefits and support provided by the initiative have encouraged more individuals to take up entrepreneurship and have contributed to the growth of the startup ecosystem in the country.

Key tax exemptions and reliefs for startups in India

Startups in India can avail themselves of several tax exemptions and reliefs under the Startup India Initiative and other government schemes. Here are some key tax benefits available to startups:

  1. Income Tax Exemption: Startups registered under the Startup India Initiative are eligible for a three-year income tax exemption. This means that they are not required to pay income tax on their profits for the first three consecutive years from the year of incorporation.
  2. Capital Gains Tax Exemption: To promote investment in startups, the government has provided an exemption from long-term capital gains tax for investments made by individuals in eligible startups. This benefit is available for investments held for a minimum period of two years.
  3. Tax Exemption on Investments above Fair Market Value: Startups can issue shares at a premium to their fair market value, and the amount received in excess of the fair market value is exempted from being treated as income. This exemption is available to investments made by “eligible investors,” including incubators, angel funds, and specified funds.
  4. Carry Forward and Set Off of Losses: Startups often face losses in their early stages. The government allows startups to carry forward and set off their losses against future profits for a period of up to eight years. This provision helps in reducing the tax liability once the startup starts making profits.
  5. Tax Exemption on Investments through Angel Funds: Investments made by angel funds in eligible startups are eligible for tax exemption under Section 56(2)(viii) of the Income Tax Act. This provision helps in encouraging angel investments in startups.
  6. Tax Benefits for Research and Development: Startups engaged in research and development activities can avail themselves of tax deductions under Section 35(2AB) of the Income Tax Act. They can claim a weighted deduction of 150% on eligible expenses incurred on scientific research and development.
  7. Tax Benefits for Incubators: Incubators recognized by the Central Government or State Government can avail themselves of tax benefits under Section 80-IAC of the Income Tax Act. They can claim a 100% tax deduction on their profits for a period of three consecutive years out of their first ten years of operation.

It is important to note that the eligibility criteria and specific conditions for availing of these tax exemptions and reliefs may vary. Startups should consult with tax professionals or seek guidance from relevant authorities to understand the complete details and requirements of these benefits.

Startup India Action Plan: A roadmap to avail tax benefits and incentives

The Startup India Action Plan provides a roadmap for startup to avail of tax benefits and incentives under the Startup India Initiative. Here is a step-by-step guide on how startups can leverage the Action Plan to access these benefits:

Step 1: Register as a Startup: Startups need to register themselves on the Startup India portal (www.startupindia.gov.in) to be recognized under the Startup India Initiative. The registration process involves providing basic details about the startup and its founders.

Step 2: Obtain Certification: Startups can apply for certification to avail of tax benefits and incentives. The application can be made through the Startup India portal. The certification is based on certain criteria, including innovation, scalability, and potential for employment generation.

Step 3: Self-Certification of Compliance: Startups need to self-certify that they fulfill the eligibility criteria mentioned in the Startup India Action Plan. This self-certification can be done through a simple online form available on the Startup India portal.

Step 4: Apply for Tax Exemptions: To avail of the income tax exemption for the first three years, startups should submit the required documents to the Inter-Ministerial Board (IMB) for certification. The documents may include a detailed business plan, audited financial statements, and other relevant information.

Step 5: Seek Angel Tax Exemption: Startups looking to avail of the angel tax exemption need to apply to the Department for Promotion of Industry and Internal Trade (DPIIT). The application should include necessary documents such as a share subscription agreement, valuation report, and approval from an inter-ministerial board.

Step 6: Claim Other Tax Benefits: Startups can claim various other tax benefits and incentives such as capital gains tax exemption, deduction for investments above fair market value, and deductions for research and development expenses. 

Step 7: Leverage Incubators and Funding Opportunities: Startups can explore the support provided by incubators and accelerators recognized under the Startup India Initiative. They can benefit from mentoring, networking opportunities, and access to funding through the Fund of Funds for Startups (FFS) scheme.

Step 8: Stay Compliant: Startups should ensure they meet the ongoing compliance requirements and adhere to the guidelines of the Startup India Initiative. This includes filing necessary reports, maintaining records, and complying with regulations related to taxation, intellectual property, and other relevant areas.

It’s important to note that the specific requirements and processes for availing tax benefits and incentives may be subject to change over time. 

R&D tax benefits for startups in India

In India, startup engaged in research and development (R&D) activities can avail themselves of tax benefits and incentives. These benefits are aimed at encouraging innovation and technological advancement. Here are the key tax benefits available for R&D-focused startups:

  1. Weighted Deduction under Section 35(2AB): Startups involved in scientific research and development activities can claim a weighted deduction under Section 35(2AB) of the Income Tax Act. This provision allows for a deduction of 150% of the eligible expenses incurred on in-house R&D.
  2. Eligible Expenses: The eligible expenses for claiming the weighted deduction include expenditures incurred on scientific research related to the business of the startup. This includes expenses for acquiring technology, hiring R&D personnel, conducting experiments, and purchasing or renting equipment for R&D purposes.
  3. Approval from the Department of Scientific and Industrial Research (DSIR): To claim the R&D tax benefits, startups need to obtain approval from the Department of Scientific and Industrial Research (DSIR), which operates under the Ministry of Science and Technology. The DSIR assesses the eligibility of startups based on their R&D activities and capabilities.
  4. Documentation and Reporting: Startups need to maintain proper documentation of R&D activities, expenses incurred, and related records. They should maintain a project-wise record of R&D work undertaken, details of R&D personnel, and supporting documents such as invoices, bills, and contracts. These records may be required for audit and verification purposes.
  5. Annual Report: Startups availing of R&D tax benefits are required to submit an annual report to the DSIR. The report should provide details of the R&D projects, expenses incurred, and outcomes achieved during the financial year. This report helps in monitoring and evaluating the progress of the R&D activities.
  6. Auditing and Compliance: Startups claiming the R&D tax benefits may be subject to audit by the income tax authorities to verify the eligibility and correctness of the claimed deductions. Therefore, it is essential to maintain proper books of accounts, obtain necessary certifications, and comply with the reporting requirements to ensure a smooth audit process.

It’s important for startups to consult with tax professionals or experts in R&D tax incentives to understand the specific requirements, documentation, and compliance procedures for availing of these benefits. The guidelines and regulations may vary, and it is advisable to stay updated with the latest developments and notifications issued by the tax authorities.

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