Are You Missing Out?

If you’ve taken the leap into entrepreneurship and launched your startup in India, here’s a not-so-secret weapon that could save you lakhs — tax exemptions under the Startup India initiative.

You can also explore eligible properties aligned with capital gains reinvestment opportunities here.

These aren’t just minor rebates or one-off perks; we’re talking full-blown tax holidays, capital gain exemptions, and relaxed investment regulations that can shift the trajectory of your business growth.

Sounds like something only big startups can access?

Not quite. These benefits are specifically crafted for early-stage, eligible startups — yes, the very ones hustling to break even, secure funding, and build a team from the ground up.

Let’s dive into what these exemptions are, why they matter, and how you might already qualify without even realizing it.

1. The Famous 3-Year Tax Holiday (Don’t Miss This Window)

Imagine building your startup without the burden of income tax for three entire years. That’s the core idea behind the 100% tax rebate on profits for eligible startups, offered within a block of any seven years from incorporation.

This isn’t open-ended though. Originally launched for startups incorporated between April 1, 2016, and March 31, 2021, Budget 2021 extended this benefit till March 31, 2022.

✅ Eligibility Checklist:

• Your startup must be recognized under the Startup India initiative.
• Annual turnover must not exceed ₹25 crores in any financial year.
• You must obtain certification from the Inter-Ministerial Board (IMB) to avail this exemption.

This tax holiday can be a game-changer when managing working capital during the formative years. Every rupee saved is a rupee reinvested in innovation.

2. Long-Term Capital Gains? Keep Them, Tax-Free.

Under Section 54EE of the Income Tax Act, eligible startups can avoid paying tax on long-term capital gains, provided the gains are reinvested in a notified fund by the Central Government.

✅ Key Conditions:

• Investment must be made within 6 months from the sale of the asset.
• Maximum investable amount: ₹50 lakhs.
• Funds must remain locked-in for 3 years.
• (Early withdrawal? Exemption is revoked.)

For startup founders or stakeholders selling assets to fund their ventures, this is a powerful legal route to save on tax while fuelling growth.

Ready to Uncover the Rest of the Tax Secrets?

The Startup India initiative offers multiple lesser-known exemptions that can completely change how you manage your startup’s finances:

• Tax-free investments above fair market value
• Capital gain exemptions for individuals investing in your startup
• Carry forward losses even after shareholding changes

Explore how:

• HUFs and Individuals can turn residential property sales into startup capital, tax-free.
• Even if your startup undergoes shareholding changes, you can still carry forward losses.
• Angel investors, incubators, and others can invest more confidently with favorable clauses.

The Hidden Tax Exemptions Every Startup Should Know (Full Guide)

3. Tax Exemption on Investments Above Fair Market Value

Startups often raise capital from angel investors, friends, family, or incubators, sometimes exceeding the fair market value (FMV) of shares.

Normally, such investments would be taxed under Section 56(2)(viib) of the Income Tax Act.

But here’s the good news:

For eligible startups, the government has exempted this tax.

✅ This means:

• No tax on investments received above FMV.
• Applies to funding from resident investors, incubators, or funds not registered as venture capital.

This removes a major barrier for early-stage fundraising, making angel and informal investment channels more accessible.

4. Exemption on Capital Gains from Sale of Residential Property – Section 54GB

Tailored for individuals or HUFs looking to invest in startups:

If you sell a residential property and invest the capital gains into equity shares (at least 50%) of an eligible startup, the capital gains become exempt from tax.

✅ Additional Conditions:

• Shares must be held for at least 5 years.
• Startup must use the funds to purchase new assets.
• Those assets should also be held for a minimum of 5 years.

This exemption is aimed at encouraging direct investments in startups, especially from high-net-worth individuals and professionals.

5. Carry Forward of Losses Despite Changes in Shareholding – Section 79 Relaxation

Normally, Section 79 of the Income Tax Act restricts the carry forward of business losses if more than 49% of shareholding changes.

But for eligible startups, this restriction is relaxed.

✅ Here’s how it works:

• Losses can be carried forward even if there’s a change in shareholding.
• Provided all original shareholders (with voting power) at the end of the year of loss continue to hold shares at the end of the financial year when the loss is set off.

This is especially helpful for startups raising equity capital, where dilution is common. You won’t lose your tax benefits just because you’ve onboarded new investors.

Final Thoughts: Are You Using Every Advantage?

The Startup India program offers more than just recognition — it’s a toolbox full of tax breaks that can significantly reduce your financial stress, especially in the early years.

Pro Tip:

Always consult with a qualified tax advisor before claiming exemptions. Eligibility often requires:

• Official recognition
• Timely filings
• Strict documentation

Whether you're bootstrapping, pre-revenue, or entering a growth phase, these tax exemptions aren’t just helpful —

they could be critical to your survival and scaling strategy.

Also, if you're dealing with property transfers while funding your startup, make sure you're aware of the penalties for not registering property in India — missing this step could impact your tax exemptions and legal standing.

Frequently Asked Questions (FAQs)

1. What is the Startup India initiative?

A flagship initiative by the Government of India aimed at promoting and supporting startups through tax benefits, easier compliance, and funding support.

2. What are the main tax benefits offered under Startup India?

Eligible startups can access:

• 100% income tax exemption for 3 consecutive years out of the first 10 years.
• Exemption on long-term capital gains if invested in a specific fund.
• Angel Tax exemption under Section 56(2)(viib).

3. Who is eligible for these tax benefits?

To qualify, a startup must:

• Be recognized by the DPIIT.
• Be a Private Limited Company or LLP.
• Be less than 10 years old.
• Have annual turnover under ₹100 crore.
• Be working on innovation or improvement of products, processes, or services.

4. How can I get DPIIT recognition?

Apply online through the Startup India portal. You’ll need:

• Basic business details
• Registration documents
• Description of the innovation/problem your startup addresses

5. I haven’t raised any funding yet. Can I still apply?

Yes. Even bootstrapped startups can apply if they meet DPIIT criteria.

6. Can an established business that pivots qualify as a startup?

If it’s under 10 years old and meets DPIIT criteria, yes — even after a pivot.

7. Do I need a CA or legal advisor to claim these exemptions?

Not mandatory, but highly recommended for accurate documentation and compliance.

8. What is Angel Tax exemption, and why is it important?

Previously taxed capital raised at high valuations.

Recognized startups are now exempt, making it

easier to raise funding.

9. Can I claim the 3-year tax holiday if my startup isn’t profitable yet?

Yes. Choose any 3 consecutive profitable years within the first 10 years.

10. What happens if my startup loses DPIIT recognition?

You may lose access to benefits. It’s crucial to maintain compliance.