DPIT Startup Recognition: Eligibility, Angel Tax Exemption and Incentive

Introduction

The Startup India Recognition under the Department for Promotion of Industry and Internal Trade ( DPIIT ) is a program that acknowledges and supports startups meeting specific criteria set by the government. This recognition grants access to a plethora of benefits and incentives designed to foster growth and innovation in the startup ecosystem.

Benefits for DPIT Recognized Startups

Registering your startup with DPIIT under the Startup India initiative offers a host of benefits, including:

• Tax Benefits: Startups registered with DPIIT are eligible for various tax incentives, including income tax exemption for the first three years.
• Funding Support: Registered startups can avail of funding support through various schemes and programs under the Startup India initiative.
• Access to Network: Startups can benefit from networking opportunities with investors, mentors, and other stakeholders in the startup ecosystem.
• Government Support: Registered startups receive support and recognition from the Government of India, which can enhance credibility and visibility.

Tax Exemption under Section 56 (2) (viib) of the Income Tax Act (Angel Tax)

Section 56(2)(viib) of the Income Tax Act provides that where a closely-held company issues shares to a person, whether resident or non-resident at a value higher than the “fair market value” of such shares, then the excess of the issue price over the fair market value will be taxed as the income of the issuer company u/s 56(2)(viib) of the Act. Rule 11UA of the Income-tax Rules provides the formula for the computation of the FMV. A recognised Startup shall be eligible for exemption under clause 56 (2) (viib), provided the aggregate amount of paid up share capital and share premium of the startup after issue or proposed issue of shares, does not exceed, twenty five crore rupees and the Recognized Startup has not made investment in certain restricted assets.

Certainly! Here’s a brief overview of the criteria your startup needs to fulfill to file the required declaration and returns for angel tax exemption:

• After issuing the shares, the startup’s maximum paid-up capital and share premium should not exceed Rs 25 crore.
• As per Rule 11 UA (2)(b) of the Income Tax Act of 1961, it is imperative for the merchant banker to evaluate the fair market value of the startup.
• The amount raised from venture capital firms, NRIs and other specific companies is not included in the calculation. The startup’s yearly turnover should not be more than Rs 100 crore in any of the past fiscal years.
• As per the income tax notification, angel investors are eligible for a 100% tax exemption on investing in startups with higher fair market value. However, to avail of this exemption, the average income of angel investors should not be more than Rs 25 lakh and should have a net worth of Rs 2 crore in the previous 3 fiscal years.
• From the date of incorporation of a business, it can reap the benefit of a tax holiday for three consecutive years. During this period, the startup is exempt from paying taxes.

 Tax Exemption for Startup u/s 80 IAC

Section 80-IAC of the Income-tax Act,1961, was introduced on 1 April 2017. The act implies that an eligible assessee who makes profits can claim 100% tax deductions for any three successive years.

Section 80-IAC of the Income Tax Act,1961 offers a tax incentive to companies or LLPs that are eligible start-ups involved in eligible businesses. It facilitates eligible startups claiming a deduction of 100% of profits and gains resulting from any entitled business engaged in innovation, development, improved products or services, or a scalable business model with a high potential for employment generation or wealth creation.

Section 80-IAC Tax Exemption Eligibility Criteria

The following criteria must be satisfied to comply with Section 80-IAC of the Income-tax Act,1961.

• The assessee is a limited liability partnership (LLP) or a company involved in an eligible business (“eligible business” refers to a business conducted by an eligible start-up that innovates, develops, or enhances products/processes or services or adopts a scalable business model capable of substantial job creation or wealth generation).
• The particular company or LLP must be incorporated after March 31, 2016 and before April 1, 2025.
• The company’s or LLP’s annual business turnover doesn’t surpass Rs. 100 Crore in the year preceding the assessment year, for which deduction is claimed as per section 80-IAC.
• The company or LLP is not established by segregating or reforming a business that already exists.

Conclusion

The DPIIT recognition and the associated income tax benefits aim to provide a conducive environment for startups in India, fostering innovation, attracting investments, and promoting entrepreneurship. However, it is crucial for startups to thoroughly understand and comply with the prescribed conditions and criteria to ensure eligibility and seamless availing of these benefits.

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