Income Tax for New Startups in India 2025

Starting a new business in India is an exciting venture, but understanding the tax obligations is crucial for compliance and financial planning. The Indian government, through initiatives like Startup India, offers several tax incentives to foster entrepreneurship and innovation. This article provides a comprehensive overview of income tax provisions for new startups in India for the financial year 2025-26 (assessment year 2026-27), including eligibility criteria, exemptions, and compliance requirements.

What Qualifies as a Startup?

To avail of tax benefits under the Startup India initiative, a business must meet the definition of an "eligible startup" as outlined by the Department for Promotion of Industry and Internal Trade (DPIIT). The key criteria include:

• Incorporation Date: The startup must be incorporated on or after April 1, 2016, but before April 1, 2030, as extended in Budget 2025.
• Business Structure: It should be a private limited company, limited liability partnership (LLP), or partnership firm.
• Turnover Limit: The annual turnover should not exceed ₹100 crore in any financial year since incorporation.
• Innovation Focus: The startup must be engaged in innovation, development, or improvement of products, processes, or services, or have a scalable business model with high potential for job creation or wealth generation.
• DPIIT Recognition: The startup must be recognized by DPIIT and hold a certificate from the Inter-Ministerial Board for certain tax benefits.

Entities formed by splitting or reconstructing an existing business do not qualify as startups.

Key Income Tax Benefits for Startups

The Indian government provides several tax exemptions and incentives to ease the financial burden on new startups, allowing them to focus on growth and innovation. Below are the primary tax benefits available in 2025:

1. Tax Holiday Under Section 80-IAC

Eligible startups can claim a 100% deduction on profits and gains from their business for three consecutive years within the first 10 years of incorporation. This tax holiday is designed to support startups during their initial phase.

• Eligibility: The startup must be incorporated between April 1, 2016, and March 31, 2030, and have a turnover not exceeding ₹100 crore in the year for which the deduction is claimed.
• Application Process: Startups must apply for this exemption through Form-1 on the Startup India portal (www.startupindia.gov.in) and obtain approval from the Inter-Ministerial Board. The approval process typically takes 3-9 months.
• Minimum Alternate Tax (MAT): Startups claiming this deduction may still be liable to pay MAT at 15% of book profits (plus applicable surcharge and cess), unless they opt for special tax regimes under Sections 115BAA or 115BAB.

2. Angel Tax Exemption

The "angel tax" under Section 56(2)(viib) of the Income Tax Act previously taxed funds raised by startups through share issuance above the fair market value (FMV). However, the Finance (No. 2) Bill, 2024, introduced a sunset clause, abolishing angel tax for shares issued on or after April 1, 2024. This means that startups raising funds from angel investors, incubators, or other non-registered venture capital funds will no longer face tax on the premium amount, significantly easing fundraising efforts.

• Conditions: For shares issued before April 1, 2024, startups needed DPIIT recognition and had to ensure that the aggregate paid-up share capital and share premium did not exceed ₹25 crore after the share issuance.
• Impact: This exemption enhances investor confidence and provides startups with more capital for operations.

3. Capital Gains Exemption Under Section 54GB

Individuals or Hindu Undivided Families (HUFs) selling residential property can invest the capital gains in equity shares of an eligible startup to claim an exemption from long-term capital gains tax.

• Conditions:
  • The investment must be made within one year from the date of sale of the property.
  • The investor must hold at least 50% of the startup’s equity shares, and these shares cannot be sold or transferred for five years.
  • The startup must use the invested amount to purchase new assets (e.g., equipment, computers, or software for tech startups) within one year, and these assets cannot be sold for five years.
• Benefit: This provision encourages investment in startups while providing tax relief to investors.

4. Exemption on Long-Term Capital Gains Under Section 54EE

Startups can benefit from exemptions on long-term capital gains if the gains (or part thereof) are invested in a fund notified by the Central Government within six months from the date of asset transfer. The maximum investment amount eligible for this exemption is ₹50 lakh.

5. Carry Forward of Losses

Eligible startups can carry forward losses incurred in the initial years, even if there is a change in shareholding, provided all shareholders holding voting power on the last day of the year in which the loss was incurred continue to hold shares on the last day of the year in which the loss is set off. This relaxation under Section 79 of the Income Tax Act allows startups to offset losses against future profits, aiding financial stability.

• Extended Period: Budget 2023 extended the carry-forward period for losses from seven to 10 years from incorporation, providing greater flexibility.

6. Higher Depreciation Rates

Startups investing in equipment, infrastructure, or technology can claim higher depreciation rates on these assets, reducing taxable income. This is particularly beneficial for tech-driven startups or those in capital-intensive sectors like manufacturing or renewable energy.

7. Special Tax Regimes

Startups can opt for concessional tax regimes under Sections 115BAA or 115BAB, which offer lower corporate tax rates (22% or 15% for manufacturing startups, respectively) but require forgoing certain deductions, including the Section 80-IAC tax holiday. These regimes are suitable for startups with consistent profits and minimal eligible deductions.

Compliance and Filing Requirements

To fully leverage these tax benefits, startups must adhere to compliance requirements:

• DPIIT Registration: Register on the Startup India portal and obtain DPIIT recognition to qualify for tax exemptions.
• Separate Books of Accounts: Maintain separate books for the eligible business and get them audited by a chartered accountant.
• Income Tax Return (ITR) Filing: File ITR by July 31 (non-audit cases) or October 31 (audit cases) for the relevant financial year. Use Form-1 for Section 80-IAC claims.
• Form 10-IEA: Startups with business income opting for the old tax regime must file Form 10-IEA before the ITR filing due date.
• Advance Tax: Pay advance tax in installments if the tax liability exceeds ₹10,000 in a financial year.

Challenges and Considerations

While the tax incentives are attractive, startups must navigate certain challenges:

• Complex Approval Process: Obtaining DPIIT recognition and Inter-Ministerial Board approval can be time-consuming, taking 3-9 months.
• Compliance Burden: Maintaining separate books, getting audits, and filing forms require dedicated resources, which can be challenging for early-stage startups.
• MAT Liability: The applicability of MAT may reduce the effective benefit of the Section 80-IAC tax holiday for some startups.
• Eligibility Restrictions: Strict criteria, such as turnover limits and innovation requirements, may exclude some startups from benefits.

Startups are advised to consult tax professionals to ensure compliance and optimize tax savings. Our Platform A1 Tax Solution (www.a1taxsolution.com) can provide expert guidance on tax planning and filing.

Conclusion

The Indian government’s tax incentives for startups, extended and enhanced in Budget 2025, create a supportive environment for new entrepreneurs. From the 100% tax holiday under Section 80-IAC to the abolition of angel tax, these measures aim to boost innovation, attract investment, and enhance cash flow for reinvestment. By understanding eligibility criteria and adhering to compliance requirements, startups can maximize these benefits and focus on scaling their operations.

For personalized tax advice and assistance with DPIIT registration, ITR filing, or claiming exemptions, visit www.a1taxsolution.com to connect with our team of experts.