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Tax Exemption
What is Tax Exemption?
The Startup India Initiative, launched by the Government of India, aims to promote entrepreneurship by providing various benefits, including tax exemptions, to eligible startups. These exemptions help reduce the financial burden on new businesses and encourage innovation and growth.
Key Tax Exemptions for Startups
Income Tax Exemption (Section 80-IAC)
- Recognized startups can avail 100% tax exemption on profits for 3 consecutive years within the first 10 years of incorporation.
- This benefit is available for Private Limited Companies and LLPs that meet the eligibility criteria.
Exemption from Angel Tax (Section 56(2)(viib))
- Startups receiving investments from angel investors, venture capital firms, or other funds are exempt from tax on the premium amount received over fair market value.
- This prevents startups from being taxed on genuine investments.
Capital Gains Tax Exemption (Section 54EE & 54GB)
- Section 54EE: Startups can get an exemption on long-term capital gains if the amount is reinvested in government-approved funds.
- Section 54GB: If an individual sells residential property and reinvests the proceeds in a startup, the capital gains tax is exempt.
Carry Forward of Losses & Setoff
- Startups can carry forward losses for up to 10 years, even if shareholding changes (unlike regular businesses, where 51% ownership must remain unchanged).
- This ensures startups can offset losses against future profits.
Eligibility for Tax Exemptions
- The startup must be recognized by DPIIT under the Startup India Initiative.
- It should be a Private Limited Company or LLP.
- Annual turnover should not exceed ₹100 crore in any financial year.
- The startup should focus on innovation, development, or improvement of products, processes, or services.
Benefits of Tax Exemptions Under Startup India
The tax exemptions provided under the Startup India Initiative offer several advantages that help startups grow and sustain their businesses. Here are the key benefits:
- Reduces Financial Burden – Startups save money by avoiding income tax for 3 years, allowing them to reinvest profits in growth.
- Encourages Investment – The angel tax exemption makes it easier for startups to attract investors without taxation on premium funding.
- Boosts Cash Flow – With capital gains tax exemptions, startups and investors can reinvest funds without losing a portion to taxes.
- Promotes Business Growth – Tax relief enables startups to focus on innovation, expansion, and hiring talent without financial stress.
- Helps in Scaling Faster – Carrying forward losses for 10 years allows startups to offset past losses when they become profitable.
- Supports Long-Term Sustainability – The tax benefits provide a safety net, ensuring startups have enough funds to operate during their early stages.
Procedure to Apply for Startup India Tax Exemptions
Step 1: Register on Startup India Portal:
- Visit the Startup India Portal.
- Create an account and fill in details about the business.
- Submit required documents, including business incorporation certificate, PAN, and other relevant details.
Step 2: Get DPIIT Recognition:
- Apply for Department for Promotion of Industry and Internal Trade (DPIIT) recognition.
- Provide details about the business model, innovation, and impact.
- Once approved, you receive a DPIIT recognition certificate.
Step 3: Apply for Tax Exemption Under Section 80-IAC:
- Visit the Income Tax e-filing portal and log in.
- Go to ‘Startup Tax Exemption’ under ‘Income Tax Exemption Form’.
- Upload required documents such as:
DPIIT recognition certificate
Business financial statements
Business plan and proof of innovation - Submit the application for review.
Step 4: Apply for Angel Tax Exemption (Section 56(2)(viib)):
- Startups seeking exemption from angel tax must submit an application on the Startup India portal.
- Required documents include:
Valuation report from a certified CA
Details of investors and funding received - The CBDT (Central Board of Direct Taxes) will review and approve the exemption.
Step 5: Track Approval Status:
- Applications for tax exemptions are reviewed by the Inter-Ministerial Board (IMB).
- If approved, the startup receives confirmation, and tax benefits are granted.
Step 6: Avail Tax Benefits:
- Once approved, the startup can claim tax exemptions in its Income Tax Returns (ITR).
- The 3-year tax holiday can be claimed in any 3 years within the first 10 years of incorporation.