Tax Exemption on Capital Gains by Startup India

The Indian government has been taking a number of measures in recent years to encourage entrepreneurship and startup growth in the country. One of these measures is the tax exemption on capital gains for startups, which was introduced as part of the Startup India initiative in 2016.

Under this initiative, startups are allowed to avail of tax exemption on capital gains if they meet certain eligibility criteria. This tax exemption is applicable to long-term capital gains arising from the sale of shares or units of a startup that has been recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).

In this blog post, we'll take a closer look at the tax exemption on capital gains for startups in India, including how it works, who is eligible to avail of it, and what benefits it can offer to startup founders and investors.

How Does Tax Exemption on Capital Gains Work for Startups?

Capital gains tax is a tax levied on the profits earned from the sale of certain assets, such as stocks, bonds, and real estate. In India, the capital gains tax rate varies depending on the type of asset and the duration for which it has been held.

Under the Startup India initiative, startups that have been recognized by the DPIIT can avail of a tax exemption on long-term capital gains arising from the sale of shares or units. Long-term capital gains are those that arise from the sale of assets that have been held for more than 24 months.

To avail of this tax exemption, startups must comply with certain eligibility criteria. These include:

1. Recognition by DPIIT: The startup must have been recognized by the DPIIT as a "startup" under its Startup India initiative.

2. Date of Incorporation: The startup must have been incorporated after April 1, 2016, but before April 1, 2021.

3. Nature of Business: The startup must be engaged in an "eligible business" which includes innovation, development or improvement of products, processes or services, or a scalable business model with a high potential for employment generation or wealth creation.

4. Shareholding: The startup must not have more than 25% of its total capital held by a person who is not a resident of India.

5. Turnover: The startup must not have a turnover of more than Rs. 100 crore in any previous year.

Once a startup meets these eligibility criteria, it can avail of tax exemption on long-term capital gains arising from the sale of shares or units. This tax exemption is available for a period of 10 years from the date of incorporation of the startup.

Who is Eligible to Avail of Tax Exemption on Capital Gains?

The tax exemption on capital gains is available to startups that have been recognized by the DPIIT as a "startup" under its Startup India initiative. To be recognized as a startup, a company must meet certain criteria, including:

1. Age: The startup must have been incorporated less than 10 years ago.

2. Turnover: The startup must have an annual turnover of less than Rs. 100 crore in any previous year.

3. Innovation: The startup must be working towards innovation, development, or improvement of products, processes, or services or have a scalable business model with a high potential of employment generation or wealth creation.

4. Incorporation: The startup must be registered as a private limited company, a limited liability partnership (LLP), or a partnership firm.

5. Certification: The startup must obtain a certificate of recognition from the DPIIT.

Benefits of Tax Exemption on Capital Gains for Startups

The tax exemption on capital gains for startups can offer a number of benefits to both startup founders and investors. Here are some of the key advantages:

1. Encourages Entrepreneurship

The tax exemption on capital gains can be a significant incentive for entrepreneurs to start new businesses, as it provides them with a favorable tax environment in which to operate. This can help to encourage more innovation and investment in the startup ecosystem, which can ultimately lead to job creation and economic growth.

2. Boosts Investment in Startups

The tax exemption on capital gains can also encourage more investment in startups, as it provides investors with a potential tax benefit. This can help to attract more funding to the startup ecosystem, which can be critical for early-stage companies that are still in the process of scaling up.

3. Attracts Foreign Investment

The tax exemption on capital gains can also be an important factor in attracting foreign investment to Indian startups. By offering a favorable tax environment, India can become a more attractive destination for foreign investors who are looking to invest in emerging markets.

4. Promotes Long-term Investment

The tax exemption on long-term capital gains can also encourage investors to take a longer-term view of their investments in startups. This can be important for startups that are still in the process of developing their business models and scaling up, as they may require longer-term funding to achieve their goals.

Conclusion

The tax exemption on capital gains for startups is an important measure introduced by the Indian government to encourage entrepreneurship and investment in the startup ecosystem. By offering a favorable tax environment for startups and investors, India can become a more attractive destination for innovation and investment, which can ultimately lead to job creation and economic growth.

At NeuSource Startup Minds India Ltd., we are committed to helping entrepreneurs navigate the complex landscape of starting and scaling a business in India. If you are interested in learning more about the tax exemption on capital gains for startups, or any other aspect of the Indian startup ecosystem, please get in touch with us today. Our team of experts is here to help you succeed.

Santosh Dantani

To start a new business is easy, but to make it successful is difficult . So For success, choose the best." Be compliant and proactive from the beginning and choose NEUSOURCE as your guidance partner.