top of page
Search

Income Tax Incentives for Startups in India

Updated: Jul 8

Startups are now being recognized almost in every Central and State laws that relate to businesses. From Companies Law to Income Tax Law, certain benefits have been carved out for startup ventures, to accommodate their unique requirements and to incentivize them in the form of financial and qualitative benefits.

In this article we dive deeper into the income tax incentives given to startups under the Income Tax Act 1961, who is eligible to avail those benefits and how to avail them.

Startup Recognition

The first step to avail incentives given to Startups under the Income Tax Act is to get recognized as a Startup. To get recognized, any entity shall first have to get itself registered with DPIIT which will unlock an array of benefits under various laws. Once registered with DPIIT, the entity shall have to get itself registered with the Inter Ministerial Board (IMB), to avail the income tax holiday under section 80-IAC of the Income Tax Act, 1961 and other incentives available under the Act, discussed in more detail below.


A. DPIIT Registration

Para 1(a) of Notification No. G.S.R. 127(E) dated 19th February, 2019, issued by the Department for Promotion of Industry and Internal Trade (DPIIT) stipulates the following conditions for considering an entity as a Startup:

  1. Not more than 10 years has elapsed since its incorporation, and it is a Pvt. Ltd. Company, LLP or a Registered Partnership Firm;

  2. Its Turnover in any financial year since its incorporation has not crossed ₹100 Cr.

  3. Entity is working towards innovation, development or improvement of products or processes or services, or if it is a scalable business model with a high potential of employment generation or wealth creation.

If an entity fulfills the above conditions, it shall apply to DPIIT on the startupindia.gov.in website for being recognized as a Startup. On being satisfied of the application, DPIIT then issues a certificate of recognition to the Startup under para 2(iii)(a) of the said Notification.


B. IMB Registration

Explanation (ii) to Section 80-IAC (4) defines an "eligible start-up" as a company or an LLP engaged in eligible business which fulfils the following conditions:

  1. It is incorporated on or after 01.04.2016

  2. Annual turnover does not exceed ₹100 Crores

  3. It holds a certificate of eligible business from the Inter-Ministerial Board of Certification

A DPIIT registered startup shall apply on the startupindia.gov.in website to get registered with IMB for availing 80-IAC benefits. Since this registration provides a suite of valuable benefits to startups under the Income Tax Act, including 100% tax exemption for 3 years, it is more stringent and lengthier than DPIIT registration.

Income Tax Incentives

Once the Startup is recognized under DPIIT, as discussed above, it becomes eligible for the following benefits under the Income Tax Act, 1961:

  1. Section 56(2)(viib) [both DPIIT and IMB registered startup] - As per this section, any Share issue at a premium by a Company shall be subject to income tax if the value at which they are issued is higher than the fair market value of the shares on the date of issue. DPIIT registered startups are exempt from this section on filing of a declaration in Form 2, subject to additional limitations stipulated in Para 4 of Notification No. G.S.R. 127(E) dated 19th February, 2019.

  2. Leaving aside the above-mentioned benefit, all other benefits under the Income Tax Act eligible to Startups are available only if the Startup is also registered with IMB, as discussed above.


Following additional benefits are available to IMB registered Startups under the Income Tax Act:

  1. Tax Holiday under Section 80-IAC - A Startup can claim 100% tax exemption in a block of 3 years out of the first 10 years from its incorporation.

  2. ESOP Relief under Section 17(2)(vi) and Section 192 - Section 17 relates to tax on perquisites received by employees from their employers. Section 17(2)(vi) states that on exercise of ESOPs by employees, the difference between the fair market value of the shares and exercise price of such options on the date of exercise, shall be considered as perquisites and therefore subject to tax in the hands of the employee under the head Salaries. Now, TDS u/s 192, applicable on salary income including perquisites, is payable in the month in which the perquisite arises. However, IMB registered Startups can defer the TDS applicable on such perquisites that arise on exercise of ESOPs, and correspondingly employees can also defer the payment of income tax on the exercise of ESOPs. The deferment is eligible to the earliest of the following dates:

    1. Expiry of 5 years from the end of the Assessment Year in which the perquisite arose

    2. Sale of the shares that the ESOPs were converted into

    3. Cessation of employment of the employee at the Startup

  3. Relief for Carry Forward of Losses under Section 72 and 79 - Section 72 relates to carry forward of Business Losses for 8 Assessment Years. Section 79 states that business losses of any Assessment Year can be carried forward only if in the last day of the year, shares of the company carrying not less than 51% of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than 51% of the voting power on the last day of the year or years in which the loss was incurred. Now in case of an IMB registered Startup, the loss incurred in any prior year shall be allowed to be carried forward and set off against the income of the year if all the shareholders of such company who held shares carrying voting power on the last day of the year or years in which the loss was incurred, continue to hold those shares on the last day of such year.

Additional Points to Remember

  • DPIIT Registration is available to a Company, LLP or Registered Partnership Firm forms of entities. However, IMB Registration is available only to a Company and LLP forms of entities.

  • DPIIT Registration is granted based on a self-declaration form available on the Startup India portal. However, IMB Registration is granted based on a lengthy application form which has to be accompanied with the audited Financial Statements of the Startup, its ITRs and CA Certificates for certain aspects. A detailed Pitch Deck and a detailed Video, both drafted and recorded based on the guidelines provided for the purpose, also have to be submitted along with the application. As of Jun'25, less than 3% of DPIIT Registered startups have been granted IMB Registration.

  • Only one benefit is available under the Income Tax Act to DPIIT registered startups. Rest of the benefits under Income Tax Act can be unlocked only after IMB Registration is received. However, only DPIIT registered Startups can go for IMB Registration.

  • Startups having DPIIT Registration are eligible for a suite of other benefits under other Laws like Companies Act and Labour Laws. They are also eligible for a range of qualitative benefits like Patent application related assistance, ease of requirements in the GeM portal for government contracts, and other benefits enumerated in the Startup India portal.

You can direct your queries or comments to the authors here.


Disclaimer: The material herein is provided for informational purposes only. The information should not be viewed as professional, legal or other advice. Professional advice should be sought prior to actions on any of the information contained herein. CKA is not responsible for any matter concluded by any person based on the contents of this article.

Comments

bottom of page