What are the tax benefits of investing in Start-ups?

Have you ever wished you could have invested in Amazon when it was still based in Jeff Bezos’ garage? Or bought a piece of Google when Larry Page and Sergey Brin rented the space in order to set up the new search engine.

Being a founder or an investor, you definitely enjoy the benefits of investing in start-ups as you can accumulate a huge personal wealth and tax exemptions.

Income Tax Benefits of investing in start-ups:

As a Start-up

Is the company an ‘eligible start-up’ that qualifies for tax benefits?

• The start-up should be registered as a partnership firm, LLP, or private limited company, according to Section 80IAC of the Income Tax Act.
• A company is considered a start-up for the first ten years after it is founded.
• The start-up should have the ability to create jobs as well as innovate products and services.
• Its turnover should have been less than INR 100 crores in any of the previous financial years.

Have you figured out what it takes to be deemed as “eligible start-up”? Let’s take a look at tax relief for investing in a start-up.

Exemption under Section 80IAC

Start-ups are entitled to a 100% tax rebate on earnings for 3 consecutive years in 7-year time period, if their annual turnover does not exceed Rs.25 crores in any given financial year.

Tax exemption on Long-term capital gains

As per section 54 EE, eligible start-ups can avail tax exemption on long-term capital gains if the gain, or a portion of it, is invested within six months of the asset transfer into a Central Government authorized fund.

Revised Income tax act under section 79 for Set-Off of Loss

The eligible start-up can carry forward the losses, if all of the shareholders of the firm who held voting power on the last day of the year in which the loss was incurred continue to hold voting power on the last day of the previous year in which the loss is to be carried forward.

As an Angel investor

In exchange for the funding, an angel investor can typically hold 25%-30% of equity share in the start-up. As per Income Tax rules of India, there are several tax benefits for angel investors.

If angel investors want to avail tax benefits of investing in start-ups, they must first get clearance from the Department of Industrial Policy’s 8-member inter-ministerial board.

Exemption Under Section 56(2) (viib)

Angel investors can enjoy tax relief for investing in a start-up as they will have to pay taxes only on the amount by which the total money collected from the start-up’s share offerings exceeds the fair market value. It is captured under “income from other sources”. However, the total amount of the paid-up share capital plus the share premium of the start-up must be less than INR 25 crore.

Exemption Under Section 54GB of the Income Tax Act

Angel investors can get tax relief for investing in a start-up through capital gains on the transfer of a residential plot if they have invested the same amount in start-up equity shares.

Coffeemug.ai provides an ideal platform for start-ups and investors to explore expansion potential by connecting them with seasoned mentors who can help them navigate funding opportunities.

As a Venture Capitalist

An individual, private partnership, or pooled investment fund that attempts to invest in and play an active role in potential new businesses that have progressed beyond the seed and angel phases is referred to as venture capital.

Under section 10 (23FB), Venture Capital firms registered under SEBI are exempted from tax in order to avoid double taxation. Taxes on revenue gained from venture capital investments must be paid by the investor.

ESOP tax exemptions

If you are among the first hires of a start-up, then you could be benefitted from early employee stock options (ESOP).

ESOP is a type of equity pay given to employees and executives by start-ups and forms part of their salary package. Under Section 17(2) ESOP was taxed as income from salary in the hands of employees. Prior to 2021-21, the employer was required to include this amount in the employee’s CTC and deduct TDS in the year of allotment.

The new regulation assures that neither TDS deduction nor ESOP tax payment is necessary while filing ITR the next year. An employee, on the other hand, is subject to tax within 14 days of the end of the relevant assessment year, the date the assessee sells such ESOP shares, or the date the taxpayer ceases to be an employee of the ESOP allotting company.

If the employer fails to deduct TDS on time, he is responsible to pay the tax. The tax and TDS rates will be those in force for the year in which the ESOP was granted in this case.

Get a clearer picture with coffeemug.ai

To know more about how as an investor you can enjoy tax benefits, engage in conversations with seasoned investors and industry experts who are well-aware of all the important benefits of investing.

FAQ

Q. How can I avail tax exemption for a startup?

A. The qualifying period for tax exemption has been extended until March 31, 2022, as part of Budget 2021. Such startups will be entitled to a tax credit of 100% on profits for 3 years in a row if their annual turnover does not surpass Rs. 25-crore in any given fiscal year.

Q. Is startup funding taxed?

A. The government has eliminated the tax on funding in qualifying startups that exceed their fair market value.

Q. Can you claim expenses before a business starts?

A. Yes, expenses can be claimed before the business starts.

Q. How are startups taxed?

A. For tax reasons, the majority of your startup expenses are classified as capital costs. They are long-term assets because you are investing in your company’s future, according to the IRS. Rather than deducting the price of an asset in the year, it is acquired, you must depreciate it.