Budget 2021 Boosts Funding for Domestic Startups and Eases Capital Raising by Extending Capital Gains Exemption

Indian Union Budget 2021-22: India has maintained a continuous focus on the start-up ecosystem in a way that favors start-up entrepreneurs. Over the years, various measures have been taken to make it easier for start-ups in India. This Budget also responds to the needs of this growing sector, for example by extending for a further year the tax exemption under Section 80-IAC of the Income Tax Act 1961 (” IT law”), so that start-ups formed until March 31, 2022. , are entitled to this exemption. Article 80-IAC of the IT Law provides for a deduction of one hundred percent of the profits and gains derived from the business by a qualifying start-up incorporated until March 31, 2022 (previously it was March 31, 2021) for 3 consecutive evaluations over 10 years.

In addition, the window for claiming exemption from tax on capital gains resulting from the transfer of residential property owned by an eligible assessee where such gains are invested in start-ups has also been extended. extended until March 31, 2022 (previously March 31, 2021). This extension will encourage domestic investment in start-ups, making it easier to raise capital for start-ups.

Finance Minister Nirmala Sitharaman, during the presentation of the Union Budget Speech 2021, proposed to encourage the formation of one-man businesses (“OPCs”) by allowing UCIs to be incorporated without any restrictions on paid-up capital and turnover. It also allowed the transformation of UCIs into any other type of company at any time without any restrictions. It has also been proposed that the residency limit of an Indian citizen be reduced for setting up CIUs from 182 days to 120 days and even non-resident Indians should be allowed to set up CIUs in India. This amendment reduces the compliance burden and incentivizes start-ups to incorporate in India.

Also read: “Budget 2021 measures for MSMEs and startups will pave the way for higher role, growth and jobs”

In addition to the above legislative proposals, the announcement regarding support for the development of a world-class Fin-Tech hub at GIFT-IFSC will also enable start-ups in the fintech ecosystem to obtain the necessary infrastructure to pursue fintech innovation. The allocation of INR 1500 crore for a proposed scheme which will provide financial incentive to promote digital payment methods and set up the national language translation mission, will add the range of opportunities to which the start-up ecosystem can participate.

While also expected some relief from provisions such as angel tax and clarification on the applicability of interest on the deferral of benefit tax payment when the employee exercises options buy shares to receive shares, directionally, the changes made in the Union Budget 2021 are a welcome move that will foster the growth of startups in India.

Ritesh Kumar is the partner of IndusLaw. The opinions expressed are those of the author.

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