Tax Exemption for Startup

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Tax Exemption for Startup

Preface: This post was originally published in 2020 and has been updated on September 29, 2025, to provide you with the most current and accurate information.

Startups are businesses that are newly established and operate with an innovative idea. In India, they are registered with the Department for Promotion of Industry and Internal Trade (DPIIT). The Indian government encourages entrepreneurs to establish startups through the flagship Startup India initiative. 

This scheme allows the startups to enjoy tax exemptions. In this blog post, we shall discuss the tax exemptions for startups in India. If you are planning to register a startup in the near future, then learning about all the exemptions will be quite helpful for you!

What is Tax Exemption for Startups?

Tax exemption means the deduction allowed by the law to reduce the income amount that would otherwise be taxed by the government. Tax exemption for startup refers to a benefit that the government provides to startups to reduce financial burden in the initial years of businesses. 

This benefit allows new businesses to focus on their growth without having to worry about paying tax. By offering exemption, the government encourages innovation and showcases support to the entrepreneurs in their startup business journey.

List of Startup Tax Exemption

Here is a list of India startup tax exemption:

• No Tax for Initial 3 Years: Startups in India enjoy 100% tax exemption for any 3 consecutive financial years out of the first 10 years from incorporation. Instead of having to pay taxes, the new business can focus on developing their business. However, this advantage is only available to businesses who are registered with the DPIIT as startups. Additionally, the start-up must be an organization that promotes innovation and the development of services and goods associated with intellectual property. 

• Tax-Free Angel Investment: Due to lack of experience, startups fail to gain the confidence of potential investors quite often. This hinders the startups’ ability to obtain capital necessary for further growth. New business owners are unable to grow their companies without large investments. In such a situation, angel investors can assist them. They bargain on the conditions and interest payable by business owners. The Indian government has declared that "angel investments" are exempt from taxes. As a result, startups can use these investments for growth without worrying about additional taxes.

• Presumptive Tax Scheme: The presumptive tax scheme, eligible startups with an annual turnover under Rs. 2 crore are eligible to enjoy certain benefits under presumptive tax scheme. Under the scheme, the business does not need to maintain a book of account. It reduces costs linked to accounting and compliance. It provides a relief to entrepreneurs.

• Carry forward of losses: DPIIT-recognized startups can carry forward their losses incurred in any of their first 10 years of incorporation for 10 subsequent years. This extends the standard 7 year limit applicable to companies that are not startups. The benefit remains available even in case the shareholding pattern changes during this period as long as the original shareholders retain at least 51% voting power both in the year the loss occurred and in the year in which it is set off.

• Exemption on Capital Gains from Residential Property: According to Section 54GB, amended by Finance Act 2016, exemption is allowed on capital gains tax when the proceeds from sale of a residential property are invested in shares of a startup. Due to this benefit, individuals and HUFs feel encouraged to invest in or establish startups using funds of residential property sales. It is important to note that the exemption is applicable only if the investor holds over 25% of shares of the company and the invested amount is used by the startup to acquire new assets before the investor files their tax return. This benefit helps individuals or HUFs invest in or establish startups using funds from property sales. The exemption applies only if the investor holds over 25% of the company’s shares and the startup uses the invested amount to acquire new assets before the investor files their tax return.

• Exemption on Long Term Capital Gain: According to Section 54EE of the Income Tax Act, eligible startups can exempt their tax on long term capital gain provided that such long term capital gain or part thereof is invested in a fund notified by the Centre within a period of 6 months from the date of transfer of the asset. Rs. 50 lakh is the max amount that can be invested in the long term specified asset. Such an amount needs to stay invested in the specified fund for a 3-year period. In case of amount withdrawal, the exemption will be revoked in the year in which the funds are withdrawn.

Conclusion

Establishing a startup in India is a great opportunity for entrepreneurs with innovative ideas. They can get their startup registered under the Startup India initiative and obtain DPIIT recognition. After this, startups can avail a 3-year tax holiday along with other tax exemptions. Need assistance Startup Registration? Connect with Registrationwala’s startup consultants! They will help you collect all the necessary documents for the registration and also help you in application filing! Our consultants will increase your chances of successful registration to a great extent!

Frequently Asked Questions (FAQs)

Q1. How can a startup attain tax-exempt status?

A. A startup can attain the tax-exempt status by gaining DPIIT recognition under Startup India initiative. 

Q2. Is there any income tax exemption for startups?

A. Yes, the startups registered with DPIIT get income tax exemptions under IT Act 1961, such as a 3 year tax holiday, capital gains benefits and carry forward of losses.

Q3. For how many years can startups carry forward losses?

A. Startups can carry forward their losses against future profits for up to 10 years since incorporation, subject to certain conditions.

Q4. For how many years can DPIIT-recognized startups claim 100% tax exemption?

A. Startups with DPIIT recognition can claim 100% income tax exemption for startups for any 3 consecutive years out of their first 10 years since incorporation.

Q5. Do startups need to pay tax on funds acquired from angel investors?

A. No, DPIIT-recognized startups are exempt from paying tax on funds acquired from angel investors.

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