India boasts of a number of promising start-ups today. The rapidly growing start-up trend is motivating and encouraging individuals with distinct ideas to turn their vision into a reality. A market study is usually conducted to identify the demand for varied services. An actionable plan is then constructed to meet the needs.
To ensure that the execution is carried out successfully, founders are keen on understanding how to budget income tax for their start-ups. This not only helps them to build their 📃 business on a solid foundation but also to comply with government guidelines.
The Government of India provides full support for the start-ups to flourish. It has issued standard regulations for the incorporation of start-ups and introduced clear tax regulations to facilitate their growth.
The start-ups incorporated are expected to fulfill all the necessary compliances. The regulations also prove to be beneficial during income tax filing. To understand how the start-ups can be eligible to enjoy benefits under the government guidelines and to budget income tax, let us deep dive into the implications.
What are the 🔍 eligibility criteria for start-ups?
Imagine two colleagues discussing the need for instant ambulance and medical services over a cup of tea. Going ahead they think of breaking down the dos and don’ts to fulfil that requirement. We can call it a start-up in the making. If these people take the extra mile and execute their unique ideas to form a venture, a new start-up is born.
Who wouldn’t want to get into a business with their colleagues/partners whom they trust?
After all, work can be fun too! 😊
It can be converted into a prospering business opportunity as there is no dearth of demand for start-ups fulfilling the needs of customers in India.
Various factors are crucial to be eligible as a start-up in India. The Start-up India Action Plan lists the eligibility criteria for setting up a new start-up:
1️⃣ The newly formed start-up entity should either be listed as a partnership firm, a private limited company, or a limited liability partnership.
2️⃣ The entity to be recognized as a start-up should have completed less than ten years from the date of its incorporation.
3️⃣ The annual turnover of the previous financial years of the start-up should be less than Rs 100 crore.
4️⃣ The start-up entity should not be established by splitting up or restructuring/downsizing any business already existing in the country.
5️⃣ The start-up entity should focus and work towards innovating, developing, or enhancing services and products. It should also aim to contribute to scaling up employment levels and enhancing wealth accumulation.
Now that we have understood the eligibility criteria for start-ups in India, let us move on to studying how start-ups can budget income tax.
Taxation 💡 for startups in India
The key regulations governing the taxation of eligible start-ups in India are:
Any entrepreneur would be thrilled to know that the benefit of enjoying a tax holiday is offered to every start-up entity incorporated between April 1, 2016, and March 31, 2022. From the date of its incorporation till the completion of a continuous period of three years out of the initial ten years of incorporation 100% tax exemption can be claimed on the profits. However, in this case, the turnover of the entity should not have crossed Rs. 25 crores.
The provision of a tax holiday is offered to the start-ups so that they can meet their initial working capital requirements without and ensure smooth cash flow.
Domestic entities are required to issue their shares at a fair market value. A merchant banker helps to determine the fair market value based on either the discounted cash flow or the net asset value (NAV). A start-up is liable to pay angel tax if it happens to receive any funds from residents of India or investment from angel investors.
What are the tax exemptions provided to individuals/Hindu undivided families?
- The shares should not be sold or transferred within the first five years since the time of their acquisition.
- Almost 50% or more equity shares of the start-up should be subscribed by capital gain.
- Any asset purchased by the start-up using the share money is not allowed to be transferred within the first five years of the asset purchase.
- The objective behind the sale is to meet business expansion and growth vision.
The relaxation provided to start-ups in taxation of Employee Stock Options (ESOP) for company’s employees
The eligible start-up can avail of income tax deduction subject to some terms and conditions for the ESOP issued to its employees on or after April 1, 2020.
Such tax benefits apart from other incentives have propelled the growth of the building of start-ups in the country. Some of the attractive provisions are as follows:
👉 Registration is done in a few simple steps and is hassle-free
👉 A patent application is quick and easy, which supports innovation
👉 The norms for External Commercial Borrowing are relaxed
👉 Start-ups are provided access to funds via Alternate Investment Funds
Nowadays, start-ups are instilling a secure future mindset within their employees by encouraging them to opt for life insurance policies. This helps the employees to protect and provide for their family’s interests and long-term needs. Furthermore, start-ups motivate them to go for a life insurance policy, which helps to get tax benefits on their income.
Start-ups can check out attractive group medical insurance plans with decent interest rates. Insurance plans pave the way for budget income tax and boost business growth as employees remain stress-free and productive. So go on, give birth to that idea of yours, turn it into an outstanding opportunity, and even make room for a budget income tax!