India’s 2026 Startup Notification: Key Reforms And The Rise Of Deep Tech Startups

1. INTRODUCTION

The Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry (“DPIIT”) has issued gazette notification G.S.R. 108(E) dated February 04, 2026 (“2026 Startup Notification”) relating to startups, superseding the erstwhile gazette notification G.S.R. 127(E) dated February 19, 2019 (“2019 Startup Notification”). This policy shift comes at a time when India ranks sixth globally in the deep tech ecosystem with over 3,600 startups in this space, and the government has launched initiatives such as #100DesiDeepTechs to identify and support leading deep tech ventures. [1] The updated notification marks a shift in policy focus, extending recognition timelines, increasing turnover thresholds, and most significantly, creating a distinct recognition pathway for deep tech startups. In this news alert, the authors undertake to analyse the substantive changes introduced by the 2026 Startup Notification and examine the continued applicability of the guidelines for recognition of startups [2] .

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2. KEY CHANGES IN THE 2026 STARTUP NOTIFICATION

2.1. Expanded Entity Eligibility

The 2019 Startup Notification limited startup recognition to private limited companies, registered partnership firms, and limited liability partnerships. The 2026 Startup Notification expands the eligible entities to include multi-state cooperative societies registered with the central registrar of cooperative societies under the Multi-State Cooperative Societies Act, 2002 and cooperative societies registered under any State or Union Territory cooperative societies act with their respective registrar of cooperative societies in India.

2.2. Increased Turnover Threshold

Under the 2019 Startup Notification, an entity would cease to be considered as a startup if its turnover exceeded INR 100 crores in any financial year since its incorporation or registration. This turnover ceiling for regular startups has been increased from INR 100 crores to INR 200 crores for any financial year since incorporation or registration. Additionally, the turnover ceiling for deep tech startups has been set at INR 300 crores for any financial year since incorporation or registration. 

2.3. Introduction of Deep Tech Startup Category

A defining feature of the 2026 Startup Notification is the formal establishment of deep tech startups as a separate category, reflecting the government’s intent to provide targeted support to ventures at the forefront of scientific and engineering innovation. A deep tech startup must satisfy all the standard startup criteria and additionally demonstrate the following attributes:

• It is working on producing a solution based on new knowledge or advancements within a scientific or engineering discipline or multiple disciplines, which is yet to be developed or is in the process of being developed;
• It has a high percentage of expenditure on research and development activities as a percentage of revenue or funding;
• It owns or is in the process of creating significant novel intellectual property and is taking steps to commercialize the same; and
• It is facing extended development timelines, long gestation periods, high capital and infrastructure requirements, and carrying large technical or scientific uncertainty.

Deep tech startups enjoy an extended recognition period of twenty years from incorporation or registration.

Entities seeking recognition as deep tech startups must provide additional documents and information, as DPIIT may deem fit.

2.4. Clarified Conditions on Startup Fund Deployment

The 2026 Startup Notification refines the restrictions on deployment of startup funds. All startups (including deep tech startups) must deploy funds primarily toward core business activities, innovation, research, scaling, or operational requirements. The 2026 Startup Notification also provides for restrictions (with more flexibility compared to the 2019 Startup Notification) from engaging in following activities or investments, except where such investment is integral to the core business operations:

• Residential house, other than that used by the startup for its business or held as stock-in-trade;
• Land or building, other than that used by the startup for its business or held as stock-in-trade;
• Loans and advances, except where lending is a substantial part of the business or such advances are made in the ordinary course of business;
• Capital contributions to other entities, unless such contribution is directly related to startup’s business or strategic objectives;
• Shares and securities, except where such investment is incidental to treasury operations or forms part of core business;
• High value modes of transport, including motor vehicles, aircraft, yachts, except where such assets are used for operational, leasing, hiring, or stock-in-trade purposes;
• Jewellery or luxury assets, unless held as stock‑in‑trade; or
• Other speculative or non‑productive assets as may be notified by the Central Government.

The 2026 Startup Notification does not expressly address the treatment of investments in digital assets, cryptocurrency, blockchain infrastructure, or emerging technology platforms. For deep tech startups working in blockchain, Web3, decentralized technologies, or fintech sectors that may hold digital assets as part of their core business model or treasury operations, the absence of explicit guidance creates regulatory uncertainty.

2.5. Interpretive Gaps in the Deep Tech Criteria

The requirement that a deep tech startup "owns or is in the process of creating significant novel intellectual property" does not specify what forms of intellectual property qualify for this purpose. This is a significant omission for software-intensive deep tech ventures. Section 3(k) of the Patents Act, 1970 excludes "computer programmes per se" from patentability in India, which means that startups working in artificial intelligence, machine learning, and software-driven engineering disciplines face a structural limitation on their ability to demonstrate IP ownership through registered patents. The 2026 Startup Notification is silent on whether trade secrets, copyright in original software or algorithms, or other unregistered forms of intellectual property suffice for this purpose. 

Further, the requirement that a deep tech startup demonstrate "a high percentage of expenditure on research and development activities as a percentage of revenue or funding" is formulated without any quantitative or qualitative benchmark. The notification does not define what constitutes a "high percentage," nor does it specify whether expenditure is to be measured against revenue, cumulative funding, or some other metric. This is of particular practical significance for artificial intelligence and data-driven startups, where a substantial portion of R&D expenditure may take the form of cloud computing and GPU infrastructure costs rather than traditional laboratory or personnel expenditure. The absence of guidance on whether such costs qualify as R&D expenditure creates meaningful uncertainty for applicants and for DPIIT in evaluating applications. 

Back to table of contents: 2. KEY CHANGES IN THE 2026 STARTUP NOTIFICATION

3. APPLICABILITY OF GUIDELINES FOR RECOGNITION OF STARTUPS

3.1. Holding Company and Subsidiary Restrictions

The guidelines for recognition of startups were issued on June 21, 2021, and provide that holding or subsidiary companies will not be permitted for recognition as startups. The 2026 Startup Notification does not expressly supersede or reference these guidelines. Accordingly, these guidelines continue to remain in force. Similarly, basis these guidelines, entities formed by joint ventures are ineligible for recognition as startups.

3.2. Structural Implications for Technology Companies

A significant proportion of technology startups, particularly those that have received foreign venture capital investment, operate through offshore holding structures, commonly incorporated in Singapore or Mauritius, with the Indian entity functioning as the operating subsidiary. This "flip" structure has been widely adopted to access international capital markets, facilitate exits through foreign listings, and optimize cross-border tax structuring. Under the existing guidelines, the Indian operating entity in such a structure is ineligible for startup recognition, as it constitutes a subsidiary of a foreign holding company. The 2026 Startup Notification does not address this position, and its continued operation represents a structural impediment for a category of startups that the government simultaneously seeks to promote as deep tech ventures.

Further, technology companies, including those in the semiconductor and pharmaceutical sectors, frequently utilise intellectual property holding structures, whereby a separate entity holds registered patents and licenses them to the operating entity. Such arrangements, which are common for tax efficiency and ring-fencing purposes, would similarly render the operating entity ineligible under the existing guidelines. Given that the ownership and commercialisation of intellectual property is a central criterion for deep tech recognition under the 2026 Startup Notification, the exclusion of entities that have segregated their IP into a holding structure creates an internal inconsistency within the policy framework. Semiconductor and hardware startups face heightened challenges as they often establish offshore entities for fabrication contracts with foundries in Taiwan, South Korea, or the USA, or maintain foreign subsidiaries for export-oriented sales and distribution while the Indian entity serves as the R&D centre. 

Back to table of contents: 3. APPLICABILITY OF GUIDELINES FOR RECOGNITION OF STARTUPS

4. CMS INDUSLAW VIEW

The formal recognition of deep tech startups reflects the government's strategic emphasis on building indigenous capabilities in advanced technologies critical for economic competitiveness and national security. By extending recognition periods and raising turnover thresholds, the 2026 framework fosters a more enabling environment for patient capital, mission-oriented growth, and sustained innovation. This is particularly significant for high-impact sectors such as semiconductors, quantum computing, space technology, advanced materials, and biotechnology, where long gestation periods and intensive R&D require both regulatory clarity and financial flexibility.

The 2026 Startup Notification provides for continuation of the tax benefits to startups pursuant to certification under Section 80-IAC of the Income Tax Act, 1961. However, the provision under the Income Tax Act, 1961 was not aligned with the extended recognition periods and higher turnover threshold for deep tech startups as discussed above, and therefore limited eligible deep tech startups to turnover not exceeding INR 100 crores in the previous year relevant to the assessment year, and eligible for benefits for any three consecutive assessment years out of ten years beginning from the year of incorporation of the startup. Under Section 140 of the Income Tax Act, 2025, effective from April 01, 2026, while the higher turnover threshold of INR 300 crores has been adopted (applying it uniformly, without distinguishing between deep tech and other startups), the remaining discrepancies are yet to be addressed. Accordingly, deep tech startups have a twenty-year recognition window but can only claim tax benefits for three years within the first ten years. Further, to qualify as a ‘eligible startup’ under Section 140 of the Income Tax Act, 2025, DPIIT recognition alone is insufficient, and the startup must also hold a certificate of eligible business from the Inter-Ministerial Board of Certification. The framework's effectiveness is diminished by critical misalignments on deep tech startups under the provisions of the 2026 Startup Notification with such income tax provisions, and it is suggested that such income tax provisions are amended to align it with the revised recognition periods and turnover threshold for deep tech startups in the 2026 Startup Notification. 

Technology startups should additionally consider: coordination with Production-Linked Incentive (PLI) schemes for semiconductor and electronics manufacturing; sector-specific regulatory requirements (fintech: RBI regulations; health tech: CDSCO approvals and health data protection; space tech: IN-SPACe licensing; telecom: DoT licensing; drones: DGCA certifications); and government procurement opportunities under the Public Procurement (Preference to Make in India) Order and Startup India Procurement Portal, particularly for critical sectors such as defence, space, semiconductors, and telecommunications.

Separately, it is also suggested that existing certified startups in the deep tech sector are seamlessly transitioned to receive the certification as a deep tech startup, ensuring continuity and access to available benefits.