Business & Marketing

Budget 2021 boosts domestic startup funding, eases capital raising by extending capital gains exemption

One was also expecting some relief on the provisions such as angel tax.

Indian Union Budget 2021-22: India has maintained a continuous focus on the start-up ecosystem in a manner that promotes start-up entrepreneurs. Over the years, various steps have been taken to make it easier for start-ups in India. The present budget also addresses the need of this growing sector such as by extending the tax holiday under Section 80-IAC of the Income Tax Act, 1961 (‘I-T Act’) by another year such that start-ups incorporated until March 31, 2022, are entitled to this exemption. Section 80-IAC of the I-T Act provides for a deduction of one hundred percent of the profits and gains derived from the business by an eligible start-up incorporated until March 31, 2022 (previously it was March 31, 2021) for 3 consecutive assessment years out of 10 years.

Further, the window for claiming exemption of capital gains tax arising from the transfer of residential property owned by eligible assessee where such gains are invested into start-ups has also been extended to March 31, 2022 (previously it was March 31, 2021). This extension will encourage domestic investments into start-ups, thereby, making it easier for start-ups to raise capital.

The Finance Minister Nirmala Sitharaman while presenting the Union Budget 2021 speech proposed to incentivise the incorporation of One Person Companies (‘OPCs’) by allowing OPCs to be incorporated without any restrictions on paid-up capital and turnover. It also allowed the conversion of OPCs into any other type of company at any time without any restriction. It was also proposed that the residency limit for an Indian citizen shall be reduced for setting up OPCs from 182 days to 120 days and even nonresident Indians shall be allowed to incorporate OPCs in India. This amendment reduces the compliance burden and incentivises start-ups to incorporate a company in India.

Also read: ‘Budget 2021 measures for MSMEs, startups will pave their ways for higher role, growth, and employment’

Besides the above legislative proposals, the announcement as regards supporting the development of a world-class Fin-Tech hub at the GIFT-IFSC will also allow start-ups in the fintech ecosystem to get the required infrastructure to further fintech innovation. The allocation of INR 1500 crores for a proposed scheme that will provide financial incentive to promote digital modes of payment and setting up the National Language Translation Mission, will add the gamut of opportunities that the start-up ecosystem can participate in.

While one was also expecting some relief on the provisions such as angel tax and clarification on the applicability of interest on deferring the payment of tax on perquisite when the employee exercises stock options to receive shares, directionally, the amendments brought in the Union Budget 2021 is a welcome move that will promote the growth of startups in India.

Ritesh Kumar is the Partner at IndusLaw. Views expressed are the author’s own.

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