India,with large number of start-ups growing exponentially day by day,now has the third largest number of start-up in the world. This not only impact the socio-economics of existing start-ups but also creates a large number of opportunities for upcoming start-ups.With the advent of Start-up India Campaign in 2016, Prime Minister Narendra Modi aimed at boosting entrepreneurship and young talent in India. The object was to finance the start-ups, provide various tax exemptions, simplify the start-up process and other benefits.

Currently, India has the second largest number of unregistered business and the reason behind is the lack of awareness among people about the benefits of a registered business. In this blog we will first discuss the government scheme for start-up and then will discuss the requirements for formation of a start-up in India and lastly will list out all the benefits of having a Start-up.

Start-up India Action Plan

In 2016 when the government launched the Start-up India Campaign, in order to meet their objective a policy framework "Start-up India Action Plan" was made. Start-up India is one of the leading initiatives of the Government which aims to nurture new and innovative start-ups in the Country. The action plan is based on the following three pillars:

  • Simplification and Handholding
  • Funding Support and Incentives
  • Industry-Academia Partnership and Incubation

With this Action Plan, the Government hopes to accelerate spreading of the Start-up movement. Under this plan, the government aims to provide various tax benefits and give access to various funding options to start-ups if they fulfil certain criteria.

Formation of Start-up

The benefits of the Start-up India Action Plan are limited to eligible start-ups in India. An entity is considered a Start-up only if it is incorporated as a Private Limited company (under the Companies Act, 2013), or registered as a Limited Liability Partnership (under the Limited Liability Partnership Act, 2008), or as a Partnership Firm (under the The Indian Partnership Act, 1932) in India.

A start-up to be registered needs to fulfil the following conditions:

  • Not more than seven years have elapsed from its incorporation/ registration (for an entity in the biotechnology sector, this period is 10 years).
  • The turnover of the entity in any financial year since incorporation/ registration has not exceeded INR 250 million.
  • The entity is working towards innovation, development or improvement of products or processes or services, or is a scalable business model with a high potential of employment generation or wealth creation.
  • Exemption is only available to Start-ups that are private companies or LLP formed on or after 01 April, 2016;
  • It holds a certificate of eligible business from Inter-Ministerial Board of Certification
  • Plant and machinery used in the business should be new and have never been used in India before;

Benefits of having a start-up

1. TAX Benefits

One of biggest advantages of the Action Plan received by the eligible Start-ups is the number of tax benefits they receive from the Government. Following are the tax benefits to Start-up:

Tax holiday for three consecutive years:

100% deduction of profit is available to all the eligible Start-ups which are formed on or after 1 April, 2016. The eligible start-ups have the option to choose any three years out of their first 10 years, in which they want to avail the tax exemption.

Capital gains tax exemption:

To boost the start-up conducive environment in India, a long-term capital gains exemption up to INR 5 million is provided. It is based on the condition that, the amount equal to capital gain arising from the sale of capital assets should be reinvested in the units of an informed fund set up for Start-ups for a period of at least three years. However, if it is withdrawn before 3 years, then exemption will be cancelled in the year in which money is withdrawn.

Carry forward of losses despite change in ownership:

The Indian Tax management permits the security of unabsorbed tax losses of Start-ups brought in the first seven years of its functioning as long as all the shareholders at the time of incurrence of losses keep on being shareholders in the Start-up organization in the time of carry forward and set-off.Therefore, such safety is intact even if the change in shareholding is beyond 49% threshold applicable in other cases.

No Angel Tax:

To encourage Start-ups in India, eligible Start-ups have been excluded from the ambit of angel or premium taxation under Section 56(2)(viib) of the Income-tax Act, 1961. Therefore, where a Start-up issues its shares to any angel investor in consideration of funding received at a price surpassing the fair market value of the shares of the Start-up, any excess over the fair market value (i.e. premium) is not taxed.

2. Faster To Exit

The Ministry of Corporate Affairs (MCA) has notified the relevant Sections 55-58 of Insolvency and Bankruptcy Code, 2016 pertaining to the Fast Track process and has further notified that the process shall apply to Start-up (other than the partnership firm) as defined by DIPP. With the help of this notification,Start-ups will now be able to wind up their business within a period of 90 days from making an application for the same as compared to the 180-day period for other firms.

3. FFS For Start-Ups

FFS stands for "Funds of Funds". In order to support innovation and creativity driven Start-ups, FFS of INR 10,000 crores has been established which is being managed by SIDBI. FFS invests in Alternative Investment Funds (AIFs) which, in turn, will invest in Start-ups. To this date, INR 600 crore has been released to SIDBI and a letter approving INR 1600 crore has been provided to SIDBI.


The Government of India by launching the Start-up India Campaign has taken a great initiative. It will not only help the young and innovative start-up ideas but also will foster the socio-economic development of the country. Today's entrepreneurs have everything from innovation to enthusiasm but they fail when it comes to arrangement of capital. Therefore, these government scheme by exempting start-ups from taxes, benefits all those creative mindsets who have the potential to change the world but fail due to lack of capital. However, there is another side to this and if we look closely,the horizon of such exemption is very limited and some of these exemptions can be claimed only after fulfilling certain conditions. With all being said one cannot deny the fact that, the initiative by the government for promoting the start-ups has been great and have pushed various entrepreneurs to start new ventures. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.