The Union Budget 2021 has extended eligibility for start-ups to claim tax holiday and capital gains exemption. A business incorporated on or before March 31, 2022, will now be eligible to claim the tax rebates of 100 per cent of its profits. The capital gains exemption given to start-ups is also extended by a year. Earlier, the end date for such claims was March 31, 2021.
"To incentivise start-ups in the country, I propose to extend the eligibility for claiming tax holiday for start-ups by one more year to March 31, 2022", Finance Minister Nirmala Sitharaman.
The moves come as a relief for start-ups as the country’s start-up ecosystem was direly looking for support from the Union Budget after the COVID-19 pandemic ruined numerous sectors and the economy in 2020.
Tax Subsidy Period Increased
Under the Startup India plan, the government had put forth a tax holiday system, which means a temporary reduction of a tax or tax subsidy for start-ups for seven years. Thus, after April 1, 2016, a start-up set up is eligible for getting 100 per cent tax reduction on its profit for three years in a block of seven years, given that its annual turnover is under the limit of Rs 25 crore in any financial year. The reason for this: to help start-ups meet the working capital requirements during the initial years of operations.
Long-term Capital Gains
As per the rules, any capital gains earned by a start-up will get tax exemption if this gain or a part of it is invested in a fund specified by the central government. This has to be done within six months from the date of transfer of the asset. Under the existing regulations, the maximum amount invested in the long term specified asset is Rs 50 lakh. The tax exemption on such gains is also extended by one year under Budget 2021. This has undoubtedly come as a relief for start-ups.
Vast Network of Start-ups, Big Opportunities
There are 41,061 govt-recognised start-ups in India. Of this, over 39,000 start-ups make up for 4,70,000 jobs, according to the 2020 Economic Survey. With as many as 38 unicorns, India’s start-up ecosystem is currently the world’s third-biggest. Of the 38 unicorns, 12 were created in 2020 alone.
A much-needed boost is given to the start-up scene by extension of time to pass as a tax holiday start-up. Further, an expansion of the time limit to be eligible for capital gains tax exclusion by investing in new businesses would see more capital being made available by the first-time investors to the start-ups. It is anticipated that the government estimates extending such time limits indefinitely in the following years to have a sustainable “patron” figure for start-ups in it.