Tax Exemption for Startups Entity under section 80-IAC & Angel Tax Exemption (After Union Budget 2020)

Ashwin Jain | Last updated: 28 September 2020

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This article explains the tax exemptions available to eligible startups in India, focusing on Section 80-IAC for profit deductions and exemption from 'angel tax' under Section 56(2)(viib). It details the conditions startups must meet to qualify for these benefits, including incorporation, turnover limits, and business focus on innovation. The process for claiming these exemptions through the DPIIT and Inter-Ministerial Board of Certification is also outlined.

Tax Exemption for Startups Entity under section 80-IAC Angel Tax Exemption (After Union Budget 2020) Startup India is a flagship initiative of the Government of India, intended to catalyse startup culture and build a strong and inclusive ecosystem for innovation and entrepreneurship in India. Si

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FAQ :

Section 80-IAC allows eligible startups a 100% deduction on their profits and gains for three consecutive assessment years within the first seven years (or ten years from 01.04.2020) from their incorporation.

To qualify, a startup must be incorporated as a company or LLP between April 1, 2016, and April 1, 2021, have a turnover not exceeding Rs. 25 Cr (Rs. 100 Cr from 01.04.2020), be engaged in innovation, and hold a certificate of eligible business from the Inter-Ministerial Board of Certification.

Angel tax is levied on closely held companies when they issue shares to residents at a price exceeding their fair market value. The excess consideration is taxed as 'Income from other sources'.

A startup registered with DPIIT can claim angel tax exemption if its paid-up share capital and premium do not exceed Rs. 25 crore. This exemption is claimed by submitting a self-declaration in Form 2 to the DPIIT.

Besides DPIIT registration and the share capital limit, the startup must not invest in specified assets like residential property (unless for rent/stock-in-trade), loans (unless in the lending business), or certain vehicles and luxury items for seven years after issuing shares at a premium.