Budget 2021 eases startup funding; FM extends eligibility for claiming tax holiday, capital gains exemption

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Updated: February 01, 2021 7:47 PM

Union Budget 2021 India: A company or an LLP incorporated on or before March 31, 2022 (earlier terminal date of March 31, 2021) undertaking eligible business will now be eligible to claim the prescribed tax rebate of 100 per cent of its profits.

Budget 2021-22, Union Budget 2021The budget on a broader level focused on promoting the setting up of new enterprises, tax holidays, and a boost to digital payments with respect to startups. (Image: PTI)

Indian Union Budget 2021-22: Finance Minister Nirmala Sitharaman in her third budget speech on Monday rolled out tax incentives for startups with respect to capital gains. The minister proposed an extension in eligibility for claiming tax holiday along with capital gains exemption for investment in startups by one year to March 2022. “In order to incentivise startups in the country, I propose to extend the eligibility for claiming tax holiday for startups by one more year to March 31, 2022…In order to incentivise funding for the startups, I propose to extend the capital gains exemption for investment in startups by one more year to March 31, 2022,” Sitharaman said. 

“A much-needed boost has been given to the startup environment by extension of time to qualify as a startup for the purposes of the tax holiday. Further, an extension of the time limit to qualify for capital gains tax exemption by investing in startups would see more capital being made available by the first time investors to the startups. It is hoped that the government considers extending such time limits indefinitely, in the coming years, to have a sustainable support mechanism around startups,” Indruj Rai, Partner, Khaitan & Co told Financial Express Online. 

A company or an LLP incorporated on or before March 31, 2022 (earlier terminal date of March 31, 2021) undertaking eligible business will now be eligible to claim the prescribed tax rebate of 100 per cent of its profits. Simultaneously, the extension of the capital gains exemption will be available to individuals and Hindu Undivided Families (HUFs) for investment in eligible startups by one more year. “In other words, the taxpayer could make investments in eligible startups in respect of the transfer of residential property undertaken anytime on or before March 31, 2022.  This will act as a boost for investments in startups during these difficult times and will augment their growth and expansion,” Lokesh Shah, Partner, L&L Partners told Financial Express Online.

Also read: Budget 2021: FM Sitharaman proposes to incentivise OPC setup to benefit startups; removes capital limits

While Sitharaman has taken proactive steps to improve the capital gains tax situation, “its implementation and oversight are key, and some pinpoints for early-stage investors in this area remain and need to be ironed out to make sure the intent of this announcement translates on the ground,” Utkarsh Sinha, Managing Director, Bexley advisors told Financial Express Online. “This extension, coupled with a similar extension for the tax holiday for qualifying as an eligible start-up, should provide a steady set of policy incentives for promoters/investors in start-ups for one more year. These are much-needed incentives for startups and promoters especially recovering from Covid,” Sridhar R, Partner, Grant Thornton Bharat LLP told Financial Express Online.

Usually, entrepreneurs who weren’t able to raise funding from investors or from their network of friends and family, either invested their own savings or raised a personal loan earlier. In the absence of both cases, usually, entrepreneurs had to sell residential properties to fund their startup. However, FM Sitharaman in the previous budget had offered respite with the extension of the exemption period for investment in startups to March 31, 2021. The minister had also proposed relaxing the minimum holding of share capital or voting rights in the startup from 50 per cent to 25 per cent. However, with Monday’s announcement, startups and investors are likely to be incentivised further. “This will be a big boost for startups, especially after Covid as they were one of the hardest hit amid the pandemic as funds dried up and operations halted for many of them. This will give them a leg up in the road to recovery.” Bala Sarda, Founder & CEO, VAHDAM India told Financial Express Online.

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