How to Avail Tax Benefits Under Startup India Scheme

How to avail tax benefits startup india This guest column is by Paras Mehra, Co-Founder,

Someone wisely defined a startup as a company that is confused about what its product is? Who its customers are? How to make money?

Also, startups mostly focus on how to increase their revenue, which is a good thing but there can be another way of increasing the surplus by reducing the cost. The big portion of the earning is taken up by the government i.e. 30% of the profits. This 30% can be saved legally for 3 years by registering under Startup India.

However, the most important thing is to understand is not every startup gets the tax benefits. There is a myth trending in the industry that once you are registered as a startup then you are eligible to avail tax benefit which is completely wrong.

Startup vis a vis Startup with Tax Benefit

Startup recognition and startup recognition with tax benefit are two different things. It can be said that “all startups may not have tax benefits, but tax benefit can only be given to a startup.”

Here are some important points relating to it:

  1. Startup recognition is provided by Department of Policy and Promotion (from now on referred to as “DIPP”) and tax benefit is approved by inter-ministerial Board of Certification.
  1. The tax benefit is given under section 80 IAC of the Income-tax Act, 1961. This section applies to the companies and LLP which are incorporated on or after 1st April 2016 and with a turnover less than 25 crores.
  1. Under normal startup, registered partnerships are also considered, but if you want to claim the tax benefit, then registered partnerships are ineligible.
  1. The tax benefit is available for three years in a lot of 5 years. i.e. startup can choose three years of his choice in a lot of 5 years. Tax benefit will be consistent throughout three years.

How to Avail the Tax Benefits

Here are the following ingredients mandatory to avail tax benefit under startup India scheme:

  • Not me too Products:

    If you are planning to start an e-commerce business and register it as a startup, then we have bad news for you. As these startups are not covered under this definition. Remember, if you want to be registered as a startup then get some innovation into your product.

  • Value addition:

    This is also one of the most important qualities that your startup possesses. What value does your product add to the customer or the industry?

  • Problem Solving:

    What problems of the society do your startup willing to solve? You must be very clear on your offerings.

  • Incorporation on or after 1st April, 2016:

    Through we have already mentioned above, we are reproducing this fact because of its importance. Make sure you are a private limited company (including One person Company) or Limited Liability Partnership (LLP) which has been registered on or after 1st April, 2016.

  • Select “need tax benefit” while filing application:

    While filing for startup India registration under, you must select the option of “registration with tax benefit.”

  • Working Business Model:

    Before filing any request or application under startup India, make sure you have a working business model, otherwise incubators may reject your application.

  • Recommendation Letter:

    This is one of the most important steps towards the startup recognition. You will need a recommendation letter before filing the startup application from the following authorities: 

    • From any incubators established in post graduate college in India
    • Letter of support from any incubator which is funded from Central or state government
    • From any incubator recognized by the Government of India.
    • Letter of funding of not less than 20 percent in equity by incubation fund/angel fund/Private equity fund/Accelerator.
    • Letter of funding from Central or state government
    • Patent filed and published in the journal
  • Inter ministerial Board:

    Once you have managed to get the recommendation letter, you will be 80% confirmed as an eligible startup. However, getting the tax benefit is another hurdle.

Whether tax benefit is to be given or not, it depends whether inter ministerial board confirm it or not. If they approve your application, then most probably you will be able to register yourself as a startup with tax benefit.

Problems in getting recommendation letter

Further, startups are finding it difficult to claim the startup benefits in India because they are not able to get the recommendation letter from the startup industry. Please read the following points which will help you in getting the recommendation letter:

  • It is not a difficult job: Directly reach out to the incubators via email or phone and tell them your case correctly. 
  • Fill the Startup application: After your connection, the incubators will send you the application form which you need to fill out properly along with the necessary documents.
  • Visit the incubators: It may also be possible that incubators may call you for meeting, and you may have to visit it personally.
  • Business should be working: Whatever your business model is, it should be working. Proposed business will not be considered by incubators.
  • Fees: The incubators may charge you Rs.5000 for this task. If your application is taken up by an expert panel, then cost will further increase by Rs.5,000/-. In any case, it will not be more than Rs.10,000/-.

Validity of Being a Startup

The startup recognition shall be valid until expiry of 5 years from the date of incorporation or if its turnover crosses 25 crores.

Once startup ceases to be eligible, then it shall intimate the DIPP with 21 days.

The Bottom Line: Action Required

Don’t just read the above article; rather plan some action points on how you can avail this benefit initiated by government of India. Further, if you find this article useful, then kindly share it to help other entrepreneurs too.

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