India’s Startup Ecosystem — May 2026: 2.07 lakh+ DPIIT-recognised startups · 110+ unicorns · 21.9 lakh direct jobs created · 3rd largest startup ecosystem globally. Angel tax is permanently dead (§56(2)(viib) abolished 1 April 2025; not carried into ITA 2025). The 80-IAC tax holiday – now §140 in ITA 2025 – is available for 3 years out of 10. The 4 Labour Codes are in force from 21 November 2025, replacing 29 old labour laws. DIR-3 KYC is now once every 3 years. Section 54GB and 54EE (startup capital gains exemptions for individual investors) are NOT carried into ITA 2025 – a critical change for HNIs planning investment using property sale proceeds. This guide covers every updated provision.
📋 Table of Contents
- ITA 1961 vs ITA 2025 – Complete Startup Section Reference Table
- What is a “Startup” Under Startup India Definition?
- DPIIT Recognition – Eligibility, Process & Benefits
- Section 140, ITA 2025 (= §80-IAC, ITA 1961): 3-Year Tax Holiday
- Angel Tax – Abolished from 1 April 2025; Not in ITA 2025
- ESOP Taxation – §17, ITA 2025: 48-Month Deferral for Startups
- §54GB – Capital Gains Exemption for Startup Investment (NOT in ITA 2025)
- §54EE – LTCG in Notified Startup Funds (NOT in ITA 2025)
- §119, ITA 2025 (= §79, ITA 1961) – Loss Carry-Forward Through Funding Rounds
- Startup Funding Compliance – FEMA, RBI & Foreign Investment
- GST Compliance for Startups
- ROC & Companies Act – DIR-3 KYC Now Every 3 Years
- 4 New Labour Codes (Effective 21 November 2025) – Impact on Startups
- Central Government Schemes for Startups – SISFS, FFS 2.0, MUDRA, CGTMSE & More
- State Government Startup Schemes – Select States
- Startup vs Normal Business — Which Structure to Choose
- Common Startup Mistakes That Cost You Tax Benefits
- Practical Case Studies
- Frequently Asked Questions
1. ITA 1961 vs ITA 2025 – Complete Startup Section Reference Table
| Provision | ITA 1961 Section | ITA 2025 Section ✓ | Status |
|---|---|---|---|
| Angel Tax – share premium above FMV | § 56(2)(viib) | ABOLISHED 1 Apr 2025 · NOT in ITA 2025 | Abolished by Finance Act 2024; not carried into new Act. All fundraising at any valuation – no tax consequence for issuer. |
| Startup 3-year income tax holiday | § 80-IAC | § 140, ITA 2025 | Benefit fully retained. 3 consecutive years out of first 10. Sunset: 31 March 2030. Requires IMB certification. |
| Loss carry-forward through funding rounds | § 79 | § 119, ITA 2025 | DPIIT startup relaxation retained. Losses not forfeited even if >51% ownership changes in funding rounds. |
| ESOP perquisite / salary definition | § 17 (includes § 17(2)(vi) for perquisite) | § 17, ITA 2025 (same number) | Section 17 retained with same number. ESOP perquisite deferral: 48 months from exercise OR cessation OR sale – whichever earliest (startup employees). |
| Capital gains exemption — property sale → startup equity | § 54GB | NOT CARRIED into ITA 2025 | LAPSED from 1 April 2026. Individual investors who previously rolled residential property LTCG into startup equity can no longer use this route for transactions from AY 2026-27. |
| LTCG reinvestment in notified startup fund | § 54EE | NOT CARRIED into ITA 2025 | LAPSED from 1 April 2026. ₹50L LTCG reinvestment in DPIIT-notified startup funds no longer available from AY 2026-27. |
| Unexplained cash credit (investor source explanation) | § 68 | § 102, ITA 2025 | Fully active. Startup must explain genuineness and source of all investor funds. PAN + source documentation mandatory. |
| Capital gains – charge | § 45 | § 67, ITA 2025 | Same rate structure; equity LTCG 12.5% (Budget 2024 change) |
| LTCG – bonds reinvestment (54EC bonds) | § 54EC | § 85, ITA 2025 | Active – ₹50L in NHAI/REC bonds; 5-year lock-in. Founders can use for property/share sale LTCG. |
| LTCG proceeds in new house property | § 54F | § 86, ITA 2025 | Active – startup equity LTCG → new house exemption |
| Income from other sources (general) | § 56 | § 92, ITA 2025 | § 56(2)(viib) specifically abolished; § 56 general provisions → § 92 |
| Books of accounts | § 44AA | § 62, ITA 2025 | Startup must maintain books once turnover exceeds threshold |
| Tax audit | § 44AB | § 63, ITA 2025 | Mandatory if turnover > ₹1 crore (business) / ₹50L (profession); increased to ₹10 crore (95% digital) |
| Presumptive taxation | § 44AD / 44ADA / 44AE | § 58, ITA 2025 | Early-stage startups below threshold can use presumptive taxation |
| New/default tax regime | § 115BAC | § 202, ITA 2025 | Default from AY 2026-27; founder individual must evaluate old vs new regime personally |
| STCG on startup equity (listed, STT paid) | § 111A – 15% | § 196, ITA 2025 – 15% | Post-IPO shares; STCG at 15% |
| LTCG on startup equity (post-IPO / listed) | § 112A – 12.5% | § 198, ITA 2025 – 12.5% | Budget 2024 raised LTCG to 12.5% (₹1.25L exemption) |
| MAT (company-level) | § 115JB – 15% | § 206, ITA 2025 – 15% | Even during §140 holiday, MAT applies on book profits. 15% of book profits is payable. |
| ITR filing | § 139 | § 263, ITA 2025 | ITR mandatory every year even during §140 holiday |
| All TDS (salaries, contractor, rent etc.) | § 192 to § 196D | § 393, ITA 2025 (consolidated) | All TDS provisions merged into one master section; rates unchanged |
⚠️ Critical: §54GB and §54EE NOT carried into ITA 2025 – Immediate impact:
Individuals and HUFs who planned to sell residential property and invest the LTCG into DPIIT startup equity to avail §54GB exemption – this provision is not available from TY 2026-27 (transactions on or after 1 April 2026). Similarly, §54EE reinvestment in notified startup funds is also gone. Individual investors who completed their property sale and startup investment BEFORE 31 March 2026 can still claim these under ITA 1961 for FY 2025-26. After that date, the ITA 2025 has no equivalent – use §85 (§54EC bonds) or §86 (§54F new house) for LTCG planning instead.
Individuals and HUFs who planned to sell residential property and invest the LTCG into DPIIT startup equity to avail §54GB exemption – this provision is not available from TY 2026-27 (transactions on or after 1 April 2026). Similarly, §54EE reinvestment in notified startup funds is also gone. Individual investors who completed their property sale and startup investment BEFORE 31 March 2026 can still claim these under ITA 1961 for FY 2025-26. After that date, the ITA 2025 has no equivalent – use §85 (§54EC bonds) or §86 (§54F new house) for LTCG planning instead.
2. What is a “Startup” Under the Startup India Definition?
DPIIT Startup India Notification (as amended 2025) — Official Definition:
An entity is a “startup” if it is a Private Limited Company, LLP, or Registered Partnership Firm, incorporated in India not more than 10 years before the date of recognition, with annual turnover not exceeding ₹100 crore in any previous financial year, working towards innovation, development or improvement of products/processes/services or a scalable business model with high employment/wealth creation potential, and NOT formed by splitting or reconstructing an existing business.
An entity is a “startup” if it is a Private Limited Company, LLP, or Registered Partnership Firm, incorporated in India not more than 10 years before the date of recognition, with annual turnover not exceeding ₹100 crore in any previous financial year, working towards innovation, development or improvement of products/processes/services or a scalable business model with high employment/wealth creation potential, and NOT formed by splitting or reconstructing an existing business.
| Parameter | Startup (DPIIT-Recognised) | Normal Business |
|---|---|---|
| Eligible entities | Pvt Ltd / LLP / Registered Partnership only | Any – OPC, sole proprietorship, public company |
| Age limit | ≤10 years from incorporation date | No limit |
| Turnover limit | ≤₹100 crore in any prior year (crossed = no longer startup) | No limit |
| Nature test | Innovation / scalable model required for recognition | Any business activity |
| DPIIT recognition | Free; online; startupindia.gov.in; 2–5 working days | Not applicable |
| Sole proprietorship | ❌ Not eligible for DPIIT recognition | ✅ Normal registration |
| One Person Company (OPC) | ❌ Not included in DPIIT definition | ✅ Normal registration |
| §140 ITA 2025 (80-IAC) holiday | ✅ Available (with IMB certification) | ❌ Not available |
Practical tip for solo founders: If you are currently a sole proprietor – convert to a Private Limited Company or LLP BEFORE applying for DPIIT recognition. The conversion date becomes the new incorporation date for startup purposes. A clean, fresh Pvt Ltd structure with innovative product/service gives the best shot at both DPIIT recognition and subsequent IMB certification for §140 (ITA 2025) tax holiday.
3. DPIIT Recognition — Eligibility, Process & Benefits
Application Process (Step-by-Step)
1
Register on Startup India Portal – Visit startupindia.gov.in → Register as startup → Mobile/email OTP sign-up
2
Select entity type – Private Limited (MCA), LLP (MCA), or Registered Partnership (Registrar of Firms)
3
Fill application – Entity details, PAN, incorporation date, description of innovation (500 words max), stage of business
4
Upload documents – Certificate of Incorporation/LLP Agreement, PAN card, brief innovation description
5
Self-certify — Declare eligibility criteria met; submit (completely free – no government fee at any stage)
6
Receive recognition – Typically 2–5 working days; unique DPIIT recognition number issued; certificate downloadable
Key Benefits of DPIIT Recognition
| Benefit Category | Benefit | Detail |
|---|---|---|
| Tax | §140 ITA 2025 (= §80-IAC) – 3-year holiday via IMB | 100% income tax deduction for 3 consecutive assessment years out of first 10 |
| Tax | §119 ITA 2025 (= §79) – Loss carry-forward | Startup losses not forfeited even if majority ownership changes in funding rounds |
| Tax | ESOP perquisite deferral – §17 ITA 2025 | 48-month deferral; employees pay tax only when they have cash (sale/exit) |
| IP | 80% rebate on patent filing fees | Massive saving on patent applications; fast-track examination |
| IP | 50% rebate on trademark filing fees | Brand protection at half cost; trademark fast-tracked |
| IP | Free IP facilitators | Government-appointed IPR professionals; legal fees borne by government |
| Regulatory | Self-certification under Labour Codes | See Section 12 – now aligned with 4 New Labour Codes |
| Regulatory | Self-certification under 3 environmental laws | No inspection for 5 years (non-hazardous activities) |
| Procurement | GeM portal fast-onboarding | Sell to government without prior experience/turnover requirements |
| Funding | SISFS eligibility | Up to ₹20L grant + ₹50L convertible debt via incubators |
| Funding | FFS 2.0 access (via AIFs) | ₹10,000 crore corpus; SIDBI → AIFs → DPIIT startups |
| Exit | IBC fast-track winding up | ~90 days vs 2–3 years for regular companies under Insolvency & Bankruptcy Code, 2016 |
4. Section 140, ITA 2025 (= §80-IAC, ITA 1961): 3-Year Income Tax Holiday
§ 140, ITA 2025 (= § 80-IAC, ITA 1961):
A DPIIT-recognised startup, after obtaining an IMB (Inter-Ministerial Board) certification, may claim 100% deduction of profits and gains from eligible business for any 3 consecutive assessment years out of the first 10 assessment years from the year of incorporation. Incorporation window: 1 April 2016 to 31 March 2030 (Finance Act 2025 extended sunset).
A DPIIT-recognised startup, after obtaining an IMB (Inter-Ministerial Board) certification, may claim 100% deduction of profits and gains from eligible business for any 3 consecutive assessment years out of the first 10 assessment years from the year of incorporation. Incorporation window: 1 April 2016 to 31 March 2030 (Finance Act 2025 extended sunset).
| Parameter | Details |
|---|---|
| ITA 1961 provision | § 80-IAC |
| ITA 2025 provision | § 140, ITA 2025 |
| Deduction rate | 100% of profits from the eligible startup business |
| Duration | Any 3 consecutive assessment years – not any 3 years |
| Window | Within first 10 assessment years from year of incorporation |
| Incorporation deadline | 1 April 2016 to 31 March 2030 (Finance Act 2025) |
| Pre-requisite 1 | Valid DPIIT recognition |
| Pre-requisite 2 | IMB (Inter-Ministerial Board) certification – separate application; higher innovation scrutiny |
| IMB review timeline | 120 days from complete application – per DPIIT reform (80th IMB meeting, April 2025) |
| Total §140 approvals (May 2026) | 3,700+ startups with IMB exemption certificates |
| Turnover during holiday | Must remain ≤₹100 crore in each year of claim |
| What income is covered | Profits from the eligible startup business only – not interest, rental, or other non-business income |
| MAT during holiday | § 206, ITA 2025 (= § 115JB, ITA 1961) – 15% MAT on book profits still applies even during §140 holiday years. Startup cannot entirely escape MAT. |
| Return filing obligation | § 263, ITA 2025 (= § 139, ITA 1961) – ITR mandatory every year even during holiday. Late filing of ITR forfeits §140 deduction for that year. |
⚠️ DPIIT Recognition ≠ §140 Tax Holiday – Critical Distinction:
DPIIT recognition is self-certified, free, and takes 2–5 days. Getting the §140 tax holiday requires a separate IMB application – with detailed innovation narrative, financial statements, ITR, shareholding pattern, and board approval. Apply for IMB certification well before your first profitable year – the exemption certificate cannot be applied retroactively to years already assessed. If you are in Year 7 of your 10-year window and haven’t applied – do it now.
DPIIT recognition is self-certified, free, and takes 2–5 days. Getting the §140 tax holiday requires a separate IMB application – with detailed innovation narrative, financial statements, ITR, shareholding pattern, and board approval. Apply for IMB certification well before your first profitable year – the exemption certificate cannot be applied retroactively to years already assessed. If you are in Year 7 of your 10-year window and haven’t applied – do it now.
5. Angel Tax – Abolished from 1 April 2025; Not Carried into ITA 2025
🗑️ § 56(2)(viib), ITA 1961 – ABOLISHED from 1 April 2025 (Finance Act 2024):
Angel tax has been completely repealed for ALL companies and ALL investor categories (domestic angels, foreign VCs, strategic investors, individuals). Section 56(2)(viib) is NOT carried into the Income-tax Act, 2025 – the provision has been permanently removed from Indian tax law.
General income from other sources: § 56, ITA 1961 → § 92, ITA 2025. But the specific angel tax sub-clause (2)(viib) is gone from both.
Angel tax has been completely repealed for ALL companies and ALL investor categories (domestic angels, foreign VCs, strategic investors, individuals). Section 56(2)(viib) is NOT carried into the Income-tax Act, 2025 – the provision has been permanently removed from Indian tax law.
General income from other sources: § 56, ITA 1961 → § 92, ITA 2025. But the specific angel tax sub-clause (2)(viib) is gone from both.
| Period | Angel Tax Position |
|---|---|
| 2012 – Introduced | § 56(2)(viib): Shares issued above FMV taxable as “income from other sources” in issuing company’s hands |
| 2019 – DPIIT exemption | DPIIT startups with paid-up capital ≤₹25 crore exempted (resident investors) |
| Finance Act 2023 — Extended | § 56(2)(viib) extended to foreign investors – significant funding chill |
| Finance Act 2024 – ABOLISHED | § 56(2)(viib) repealed for ALL investors from 1 April 2025. No cap, no DPIIT requirement, no Form 56. |
| ITA 2025 (AY 2026-27 onwards) | § 56(2)(viib) NOT in ITA 2025. General § 56 → § 92, ITA 2025. Angel tax does not appear in new Act. |
| Pre-April 2025 notices (ongoing) | Angel tax demands for share issues BEFORE 1 April 2025 continue under old law – no retrospective benefit. Consult GCA for pending proceedings. |
Post-abolition: What still applies — § 102, ITA 2025 (= § 68, ITA 1961):
While angel tax is dead, § 102, ITA 2025 (unexplained cash credit) is fully active. Startups must still establish the genuineness and source of investor funds for every funding round. Required documentation: investor PAN, source of investment funds (bank statements), investment rationale, valuation methodology. A well-structured due diligence kit for each investor protects against § 102 notices even when angel tax is gone.
While angel tax is dead, § 102, ITA 2025 (unexplained cash credit) is fully active. Startups must still establish the genuineness and source of investor funds for every funding round. Required documentation: investor PAN, source of investment funds (bank statements), investment rationale, valuation methodology. A well-structured due diligence kit for each investor protects against § 102 notices even when angel tax is gone.
6. ESOP Taxation – §17, ITA 2025: 48-Month Deferral for Startup Employees
General ESOP Tax Framework
| Event | Tax? | Nature | ITA 1961 | ITA 2025 |
|---|---|---|---|---|
| Grant of options | No tax | — | — | — |
| Vesting of options | No tax | — | — | — |
| Exercise of options | Perquisite income | FMV at exercise – exercise price = perquisite; taxable as salary | § 17(2)(vi) | § 17, ITA 2025 (same section) |
| Sale of shares post-exercise | Capital gains | Sale price – FMV at exercise = CG; STCG or LTCG per holding period | § 45/111A/112A | § 67/196/198, ITA 2025 |
The Deferral – Startup Employees Under ITA 2025
§17, ITA 2025 – ESOP Perquisite Tax Deferral for DPIIT Startup Employees:
For employees of DPIIT-recognised eligible startups, perquisite tax at exercise is deferred to the earliest of: (a) 48 months from exercise date, (b) date of leaving the company, (c) date of selling the shares. TDS deducted by employer at deferral trigger under § 393, ITA 2025 (= § 192, ITA 1961).
This is an improvement from ITA 1961’s 5-year deferral to 48 months, with TDS at the deferred event when employee actually has cash.
For employees of DPIIT-recognised eligible startups, perquisite tax at exercise is deferred to the earliest of: (a) 48 months from exercise date, (b) date of leaving the company, (c) date of selling the shares. TDS deducted by employer at deferral trigger under § 393, ITA 2025 (= § 192, ITA 1961).
This is an improvement from ITA 1961’s 5-year deferral to 48 months, with TDS at the deferred event when employee actually has cash.
| Parameter | ITA 1961 (FY ≤ 2025-26) | ITA 2025 (TY 2026-27+) |
|---|---|---|
| Section | § 17(2)(vi) | § 17, ITA 2025 |
| Deferral period (DPIIT startup) | 5 years from exercise OR cessation OR sale (whichever earliest) | 48 months from exercise OR cessation OR sale (whichever earliest) |
| TDS by employer | § 192 at deferred event | § 393, ITA 2025 at deferred event |
| Non-startup employees | Perquisite tax at exercise (no deferral) | Perquisite tax at exercise (no deferral) under § 17, ITA 2025 |
| Capital gains on sale | § 45; FMV at exercise = cost basis | § 67, ITA 2025; FMV at exercise = cost basis |
7. §54GB – Capital Gains Exemption for Startup Investment (NOT in ITA 2025)
⚠️ CRITICAL CHANGE: §54GB – NOT carried into ITA 2025. Lapsed from 1 April 2026.
Under § 54GB, ITA 1961, an individual or HUF earning LTCG on sale of a residential property could invest the net sale consideration in equity shares of a DPIIT-recognised startup within 6 months to claim exemption from LTCG (5-year lock-in on startup shares).
This provision has NOT been carried into the Income-tax Act, 2025. For property sales from TY 2026-27 (1 April 2026 onwards) – no equivalent provision exists for rolling residential property LTCG into startup equity.
Last chance: Property sold on or before 31 March 2026 with investment in DPIIT startup equity within 6 months – can still claim §54GB under ITA 1961 for FY 2025-26. After that, the route is closed.
Under § 54GB, ITA 1961, an individual or HUF earning LTCG on sale of a residential property could invest the net sale consideration in equity shares of a DPIIT-recognised startup within 6 months to claim exemption from LTCG (5-year lock-in on startup shares).
This provision has NOT been carried into the Income-tax Act, 2025. For property sales from TY 2026-27 (1 April 2026 onwards) – no equivalent provision exists for rolling residential property LTCG into startup equity.
Last chance: Property sold on or before 31 March 2026 with investment in DPIIT startup equity within 6 months – can still claim §54GB under ITA 1961 for FY 2025-26. After that, the route is closed.
| Parameter | §54GB, ITA 1961 (applicable up to FY 2025-26) | ITA 2025 |
|---|---|---|
| LTCG on residential property → startup equity | ✅ Available: 6-month window; 5-year lock-in on startup shares | NOT CARRIED – NO EQUIVALENT |
| Alternative available from TY 2026-27? | — | Use § 85 ITA 2025 (= §54EC – NHAI/REC bonds, ₹50L cap) or § 86 ITA 2025 (= §54F – invest in new house) for LTCG planning |
8. §54EE – LTCG in Notified Startup Funds (NOT in ITA 2025)
⚠️ §54EE – NOT carried into ITA 2025. Lapsed from 1 April 2026.
Under § 54EE, ITA 1961, any person earning LTCG on any long-term capital asset could invest up to ₹50 lakh in units of government-notified startup funds to claim LTCG exemption (3-year lock-in). This provision is not in ITA 2025. The LTCG reinvestment in notified startup funds route is closed from TY 2026-27.
Under § 54EE, ITA 1961, any person earning LTCG on any long-term capital asset could invest up to ₹50 lakh in units of government-notified startup funds to claim LTCG exemption (3-year lock-in). This provision is not in ITA 2025. The LTCG reinvestment in notified startup funds route is closed from TY 2026-27.
Planning alternatives for LTCG after §54GB and §54EE lapse:
- § 85, ITA 2025 (= §54EC): Invest LTCG up to ₹50L in NHAI/REC/PFC bonds – 5-year lock-in; universal (not just startup-related)
- § 86, ITA 2025 (= §54F): Invest net sale consideration in a new residential house – universal LTCG exemption
- § 82, ITA 2025 (= §54): Reinvest house property LTCG in another house property
- Carry-forward and set-off of capital losses under § 119, ITA 2025 (= §79) against future capital gains
- Direct investment in DPIIT startup via AIF registered at GIFT City – NR investors get capital gains exemption under § 11 Schedule VI, ITA 2025
9. §119, ITA 2025 (= §79, ITA 1961) — Loss Carry-Forward Through Funding Rounds
§ 119, ITA 2025 (= § 79, ITA 1961) — General Rule:
For a closely held company, if beneficial ownership of shares changes by more than 51% compared to the year losses were incurred — carry-forward of those losses is disallowed. DPIIT startup exception: Losses are preserved even through funding rounds (even if >51% ownership change), provided the startup holds valid DPIIT recognition and the change is genuine business funding (not tax avoidance restructuring).
For a closely held company, if beneficial ownership of shares changes by more than 51% compared to the year losses were incurred — carry-forward of those losses is disallowed. DPIIT startup exception: Losses are preserved even through funding rounds (even if >51% ownership change), provided the startup holds valid DPIIT recognition and the change is genuine business funding (not tax avoidance restructuring).
§119 ITA 2025 – Startup Loss Preservation Through Funding Rounds
FinTech Pvt. Ltd. – ₹3 crore loss in FY 2023-24. Founders held 80%. Post Series A (FY 2025-26): Founders 35%, VC 65%.
| Scenario | Without §119 Exception | With §119 Exception (DPIIT) |
|---|---|---|
| Ownership change (80% → 35% founder) | Change >51% → ₹3 crore loss FORFEITED under § 79/119 | ₹3 crore loss PRESERVED — § 119 startup exception applies |
| Tax benefit | Loss gone; full tax on future profits | ₹3 crore set-off against future profits → ₹75L+ tax saving at 25% |
10. Startup Funding Compliance – FEMA, RBI & Foreign Investment
| Investor Type | Route | RBI Approval? | Key Filing |
|---|---|---|---|
| Foreign VC / PE (FDI) | Automatic Route – FEMA 20(R) | No | FC-GPR on FIRMS portal within 30 days of receiving funds; FLA annual return by 15 July |
| NRI (repatriable) | FDI route (NRE/FCNR funds) | No | FC-GPR; SDS filing; FEMA pricing compliance |
| NRI (non-repatriable) | Deemed domestic (NRO funds) | No | Normal share allotment; no FC-GPR for non-repatriable |
| Convertible instruments (SAFE, CCDs) | FDI from date of receipt; pricing norms at conversion | No (Automatic) | FC-GPR at allotment; value reported at face value initially |
| China / Pakistan / FATF-blacklisted | Approval Route – Government/DPIIT approval | Yes | Prior approval; complex process; significant delays |
⚠️ FC-GPR within 30 days is the most violated FEMA requirement for startups. Late FC-GPR filing is a FEMA contravention even when the underlying investment is perfectly legal. Penalty: Compounding with RBI (typically 0.25–0.5% of amount per year). File immediately upon receiving foreign funds – before updating MCA records is fine but FC-GPR cannot wait.
11. GST Compliance for Startups
| Situation | GST Requirement | Key Points |
|---|---|---|
| Services revenue ≤₹20L/year | Registration not mandatory | Voluntary registration recommended for B2B clients who need your GST invoice for ITC |
| Services revenue >₹20L/year | Registration mandatory | Register within 30 days of crossing threshold; GSTR-1 + GSTR-3B monthly/quarterly |
| Software / SaaS / IT services to foreign clients | Zero-rated – export of services | File LUT (Form RFD-11) by 31 March annually; claim ITC refund on inputs via Form RFD-01 |
| Foreign platform payments (Google Ads, AWS, Zoom, GitHub) | 18% IGST under RCM – import of services | § 5(3), IGST Act: Self-invoice within 30 days; pay 18% IGST from ECL; claim ITC in GSTR-3B |
| Marketplace selling (Amazon/Flipkart/Meesho) | GST mandatory from Day 1 – § 24(ix) | No threshold; TCS at 1% by platform (GSTR-8 → GSTR-2B credit) |
| B2B SaaS/subscription (domestic) | 18% GST on all subscriptions | GSTR-1; e-invoice if turnover >₹5 crore |
| Equity / funding received | Not a supply – no GST | Capital receipts outside GST; shares issued not subject to GST |
| ESOP shares to employees | Not a supply – no GST | ESOP issuance is not a GST supply event; only income tax implications |
| Interest on loans / debentures issued | Exempt financial service | Interest income on loans/NCDs exempt from GST – Entry 27, NN 12/2017-CT(R) |
Critical Year 1 GST checklist for funded startups: (1) Register for GST immediately if any foreign service payments are being made – RCM on AWS/Google/Zoom applies from Day 1; (2) File LUT before first export invoice; (3) Set up monthly RCM self-invoice workflow for all foreign vendor payments; (4) Track all input GST – it’s refundable if your output is zero-rated export.
12. ROC & Companies Act – DIR-3 KYC Now Every 3 Years
🆕 DIR-3 KYC Frequency Change – MCA Notification G.S.R. 943(E) dated 31 December 2025:
The Companies (Appointment and Qualification of Directors) Amendment Rules, 2025 changed the DIR-3 KYC filing frequency from annual to once every 3 consecutive financial years, effective 31 March 2026.
Due date: 30 June of the third financial year in the compliance cycle.
Event-based update: Any change in mobile number, email address, or residential address must still be updated within 30 days of change via DIR-3 KYC Web — this is separate from the triennial filing and does NOT reset the 3-year cycle.
DIN deactivation: If triennial KYC not filed by 30 June of the due year – DIN deactivated (same consequence as earlier annual default).
The Companies (Appointment and Qualification of Directors) Amendment Rules, 2025 changed the DIR-3 KYC filing frequency from annual to once every 3 consecutive financial years, effective 31 March 2026.
Due date: 30 June of the third financial year in the compliance cycle.
Event-based update: Any change in mobile number, email address, or residential address must still be updated within 30 days of change via DIR-3 KYC Web — this is separate from the triennial filing and does NOT reset the 3-year cycle.
DIN deactivation: If triennial KYC not filed by 30 June of the due year – DIN deactivated (same consequence as earlier annual default).
| Parameter | Old Rule (Annual) | New Rule (Triennial – from 31 March 2026) |
|---|---|---|
| Filing frequency | Every financial year | Once every 3 consecutive financial years |
| Due date | 30 September annually | 30 June of the relevant (third) financial year |
| Director filed KYC for FY 2025-26 | Next due FY 2026-27 | Next due by 30 June 2028 (FY 2027-28) |
| New DIN allotted in FY 2025-26 | KYC due by Sept 2026 | First KYC due by 30 June 2029 (April-June 2029) |
| Change in mobile/email/address | Event-based: update within 30 days | Event-based: update within 30 days (unchanged). Does NOT reset 3-year cycle. |
| Consequence of non-filing | DIN deactivated; ₹5,000 reactivation fee | DIN deactivated; same reactivation procedure |
| Benefit to startups | Annual compliance burden | Reduced to once in 3 years – significant compliance saving for founders with multiple directorships |
Other ROC Compliance for Startups
| Compliance | Deadline | Penalty for Late Filing |
|---|---|---|
| AOC-4 (Financial Statements) | 60 days from AGM date (AGM within 6 months of FY end = by 30 September; AOC-4 by 29 November) | ₹100/day per form – no cap; compounds rapidly |
| MGT-7 / MGT-7A (Annual Return) | 60 days from AGM date | ₹100/day – no cap |
| Board meetings | Minimum 4 per year; not more than 120 days gap between consecutive meetings | ₹25,000 penalty on company + ₹5,000 on each officer in default |
| Statutory audit | Mandatory from Day 1 for Pvt Ltd (no threshold); CA firm audit of annual accounts | Criminal liability for failure under Companies Act |
| DIR-3 KYC | 30 June every 3rd year (from 31 March 2026); event-based within 30 days | DIN deactivation; ₹5,000 reactivation fee |
| Form 22A (Active Company Tagging) | If prompted by MCA – file within deadline to retain “Active” status | Company marked “Inactive” – prevents future filings |
| MSME-1 (if payments to MSMEs outstanding >45 days) | Half-yearly: 31 October (H1) and 30 April (H2) | ₹25,000 per half-year |
13. 4 New Labour Codes (Effective 21 November 2025) – Complete Startup Impact
🆕 4 Labour Codes – Effective 21 November 2025:
The central government notified the commencement of all 4 Labour Codes from 21 November 2025, consolidating and replacing 29 old central labour laws. Draft Central Rules published 30 December 2025 — being finalised as of May 2026. State governments are in the process of adopting corresponding state rules.
The central government notified the commencement of all 4 Labour Codes from 21 November 2025, consolidating and replacing 29 old central labour laws. Draft Central Rules published 30 December 2025 — being finalised as of May 2026. State governments are in the process of adopting corresponding state rules.
| Labour Code | Laws Consolidated | Key Provisions Affecting Startups |
|---|---|---|
| Code on Wages, 2019 | Payment of Wages Act 1936, Minimum Wages Act 1948, Payment of Bonus Act 1965, Equal Remuneration Act 1976 |
|
| Code on Social Security, 2020 | EPF Act 1952, ESIC Act 1948, Maternity Benefit Act 1961, Payment of Gratuity Act 1972, EDLI Scheme, Employees’ Compensation Act, and 4 others |
|
| Occupational Safety, Health & Working Conditions Code (OSH Code), 2020 | Factories Act 1948, Mines Act 1952, Contract Labour (Regulation & Abolition) Act 1970, Building & Construction Workers Act 1996, and 9 others |
|
| Industrial Relations Code, 2020 | Industrial Disputes Act 1947, Trade Unions Act 1926, Industrial Employment (Standing Orders) Act 1946 |
|
DPIIT Self-Certification Under Labour Codes
The DPIIT Startup India notification provided self-certification under 6 specific old labour laws (no inspection for 3 years). With 4 Labour Codes now replacing 29 laws (including those 6), the DPIIT notification is expected to be updated to reference the relevant provisions of the new Labour Codes. As of May 2026, startups should continue to self-certify under the transitional provisions while the DPIIT notification is updated. Key: PF, ESIC, and Gratuity compliance under the Code on Social Security, 2020 is NOT covered by self-certification – mandatory from applicable employee thresholds.
Key 50% Basic Wage Rule – Impact on Startup CTC Structuring
⚠️ The 50% basic wage rule changes startup CTC design significantly:
Many startups historically structured CTC with high allowances (HRA, special allowance, LTA, meal coupons) and low basic pay to reduce PF contribution (both employer and employee). Under the Code on Wages, 2019 – basic wages must be ≥50% of total remuneration. A ₹10L CTC package must have ≥₹5L as basic wages — significantly increasing PF contribution base. This increases both employee take-home reduction and employer PF cost. Review all CTC structures before the State Rules are finalised in your state.
Many startups historically structured CTC with high allowances (HRA, special allowance, LTA, meal coupons) and low basic pay to reduce PF contribution (both employer and employee). Under the Code on Wages, 2019 – basic wages must be ≥50% of total remuneration. A ₹10L CTC package must have ≥₹5L as basic wages — significantly increasing PF contribution base. This increases both employee take-home reduction and employer PF cost. Review all CTC structures before the State Rules are finalised in your state.
14. Central Government Schemes for Startups – SISFS, FFS 2.0, MUDRA & More
| Scheme | Nodal Ministry / Agency | Support Type | Amount / Scope |
|---|---|---|---|
| Startup India Seed Fund Scheme (SISFS) | DPIIT | Grant + convertible debentures/debt via incubators | Up to ₹20L grant (PoC/validation) + up to ₹50L convertible debt (prototype/market entry) + up to ₹1.5 crore (scale-up); through DPIIT-selected incubators; SISFS extended to 31 May 2026 |
| Fund of Funds for Startups 2.0 (FFS 2.0) | DPIIT + SIDBI | Equity via registered AIFs investing in startups | ₹10,000 crore government corpus; SIDBI invests in SEBI-registered AIFs; AIFs invest in DPIIT startups; FFS 1.0 mobilised ₹25,500 crore to 1,370+ startups via 145 AIFs |
| PM Mudra Yojana (PMMY) | Ministry of Finance / MUDRA Ltd. | Collateral-free loans via scheduled banks / NBFCs / MFIs | Shishu: up to ₹50,000 · Kishor: ₹50,001–₹5L · Tarun: ₹5L–₹10L · Tarun Plus: ₹10L–₹20L (enhanced 2026); MUDRA guarantee covers most loans; suitable for early-stage micro ventures |
| CGTMSE (Credit Guarantee Fund Trust for MSEs) | Ministry of MSME / SIDBI | Credit guarantee for collateral-free loans | Cover up to ₹20 crore; 75–85% coverage (85% for startups / first-generation entrepreneurs); 90% for women entrepreneurs / SC/ST / NER; requires MSME/Udyam registration |
| Stand-Up India | Ministry of Finance / SIDBI | Bank loans for greenfield enterprises | ₹10L-₹1 crore per SC/ST or women entrepreneur; one beneficiary per bank branch; covers manufacturing, services, trading |
| Atal Innovation Mission (AIM) | NITI Aayog | Incubation + grants + mentoring | Atal Incubation Centres: up to ₹10 crore for 5 years; Atal Tinkering Labs in schools (STEM innovation pipeline); Atal New India Challenges: up to ₹1 crore for product/solution development |
| SAMRIDH Scheme | MeitY (Ministry of Electronics & IT) | Matching investment for software product startups | Up to ₹40L (Tranche 1) + ₹40L (Tranche 2) = ₹80L total as direct investment for scaling software products; DPIIT-recognised software product startups only |
| Startup India Hub | DPIIT | Platform for mentoring, networking, scheme access | Single point of contact for resources, mentors (5,000+), investors, government connections; free to join for DPIIT-recognised startups |
| IP Facilitation (Patent/TM) | DPIIT / CGPDTM | Fee rebates + facilitators | 80% rebate on patent fees; 50% rebate on trademark fees; free IP facilitators (legal professionals) appointed by DPIIT; fast-track patent examination |
| National SC-ST Hub (NSSH) | Ministry of MSME | Support for SC/ST entrepreneurs | Mentoring, market linkage, credit facilitation, special procurement quota enforcement |
| GeM (Government e-Marketplace) | Ministry of Commerce | Access to ₹4 lakh crore+ annual government procurement | DPIIT startups onboard without prior experience/turnover conditions; ₹2L+ crore transactions on GeM annually; priority access for startup sellers |
| PLI Schemes (sector-specific) | Various ministries | Production Linked Incentive | Startups in electronics, EV, pharma, food processing, textiles, semiconductors – sector-specific PLI incentives; apply via nodal ministry; substantial cash incentives on incremental production |
| SIDBI Schemes (direct lending) | SIDBI | Direct debt and quasi-equity for startups | SIDBI Venture Capital + SIDBI direct lending; rates lower than commercial banks; SIDBI SAFE (Startup Accelerator Funding Entry) for seed-to-Series A startups |
SISFS – Most underutilised scheme in India’s startup ecosystem:
Despite being one of the most startup-friendly funding programmes, SISFS uptake has been limited due to awareness gaps and the multi-layer incubator application process. DPIIT-recognised startups at validation/prototype stage should immediately identify SISFS-associated incubators in their sector on startupindia.gov.in and apply. The grant component (up to ₹20L) is non-dilutive – it does not reduce founder equity. The ₹50L convertible component is available at investor-friendly terms. With the scheme deadline extended to 31 May 2026 – time is running out for the current tranche.
Despite being one of the most startup-friendly funding programmes, SISFS uptake has been limited due to awareness gaps and the multi-layer incubator application process. DPIIT-recognised startups at validation/prototype stage should immediately identify SISFS-associated incubators in their sector on startupindia.gov.in and apply. The grant component (up to ₹20L) is non-dilutive – it does not reduce founder equity. The ₹50L convertible component is available at investor-friendly terms. With the scheme deadline extended to 31 May 2026 – time is running out for the current tranche.
15. State Government Startup Schemes – Select States
Multiple state governments have their own Startup Policies offering matching grants, reimbursements, tax incentives, office space, mentoring, and facilitation beyond what the central government provides. Below are key state programmes – always verify current scheme status at the respective state startup mission website as policies are updated frequently.
| State | Scheme / Initiative | Key Benefit |
|---|---|---|
| Gujarat | Startup Gujarat Policy; iCreate (International Centre for Entrepreneurship and Technology) | Seed assistance up to ₹30L (50% matching grant); office space at iCreate; IP reimbursement; 5-year SGST reimbursement for eligible startups; dedicated Startup Gujarat portal |
| Karnataka | Karnataka Startup Policy 2022-27; K-Tech Innovation Hub; KBITS; Elevate Karnataka | Elevate Karnataka: up to ₹50L equity-free grants; K-Tech hubs across Bengaluru/Mysuru/Hubli; ESOP facilitation; procurement preference |
| Maharashtra | Maharashtra Startup Week; Maharashtra IT Policy; MIDC startup parks | Office space subsidies; Maharashtra State Innovation Society grants; interest subsidies on loans; facilitation for international market entry |
| Telangana | T-Hub (world’s largest startup incubator); T-Works (hardware); T-Angel (angel fund) | T-Hub hosts 3,000+ startups; T-Works: hardware prototyping facility; T-Angel: DPIIT-recognised startups get priority; Global market linkage programmes; strong SPOC (single point of contact) |
| Kerala | Kerala Startup Mission (KSUM); Startup Warehouse | Startup warehouse: co-working + residential; KSUM grants up to ₹15L; KSUM Accelerator (KBA); International expansion support; dedicated digital health and AI tracks |
| Delhi | Delhi Government Startup Policy; Startup Delhi | Seed grant up to ₹25L; IP reimbursement 50%; office space facilitation; startup scholarships for students; expedited NoC for certain businesses |
| Tamil Nadu | StartupTN; TIDEL Park; TANSIM | TIDEL Park: subsidised office space; StartupTN grants; global accelerator programmes; hardware/IoT-specific support at TITAN (Tamil Nadu Innovation and Technology Accelerator) |
| Rajasthan | iStart Rajasthan | Seed funding up to ₹25L; office space; mentors; government procurement preference; 5% price preference on GeM for iStart startups |
| Uttar Pradesh | UP Startup Policy 2020; IndiaTech ONE | Seed assistance ₹5L–₹25L; Noida/Lucknow incubators; 100% SGST reimbursement for 5 years; interest subsidy on loans; one-time grant for women entrepreneurs ₹5L |
| Uttarakhand | Uttarakhand Startup Policy | Seed grant ₹15L; rental subsidy for office; mentoring; priority land for hardware startups; tourism-tech and agri-tech focus tracks |
| Andhra Pradesh | AP Innovation Society; AP Startup Policy | Grants up to ₹50L; AP Centres of Excellence in 7 sectors; international market entry support; procurement fast-track |
| Odisha | Odisha Startup Policy 2022 | Grant up to ₹20L; STPI-Bhubaneswar incubation; tech parks at reduced rent; Startup Odisha conclave for networking and investor access |
How to access state schemes: (1) Ensure DPIIT recognition (most state schemes require it as prerequisite); (2) Visit your state’s startup mission website; (3) Many state schemes require a separate state-level startup registration (in addition to DPIIT recognition) – check state portal; (4) Application windows open periodically (quarterly/bi-annual) – don’t miss the window; (5) Some state grants require 1:1 matching by private investment – coordinate with your angel investor or VC for matching grant applications.
16. Startup vs Normal Business – Which Structure to Choose
| Parameter | DPIIT-Recognised Startup (Pvt Ltd / LLP) | Normal Pvt Ltd / LLP | Proprietorship |
|---|---|---|---|
| §140 ITA 2025 (80-IAC) holiday | ✅ 3 years out of 10 (IMB certification required) | ❌ Not available | ❌ Not available |
| Angel tax (§ 56(2)(viib)) | Abolished for all – no longer relevant | Abolished for all | N/A (no shares issued) |
| §119 ITA 2025 loss carry-forward | ✅ Relaxed – losses preserved through funding rounds | ❌ Full §119 restriction applies on >51% ownership change | N/A — individual’s losses carry forward under different provisions |
| ESOP deferral (§17, ITA 2025) | ✅ 48-month deferral for employees | ❌ Tax at exercise (no deferral) | ❌ Cannot issue ESOPs |
| Patent fee rebate | ✅ 80% rebate; fast-track examination | ❌ Full patent fees | ❌ Full patent fees |
| Trademark fee rebate | ✅ 50% rebate | ❌ Full TM fees | ❌ Full TM fees |
| GeM procurement access | ✅ Without turnover/experience conditions | ❌ Prior experience/turnover required | ❌ Similar restrictions |
| Labour law self-certification | ✅ Under applicable Labour Codes (no inspection 3 years) | ❌ Full compliance from Day 1 | ❌ Full compliance |
| IBC fast-track winding | ✅ ~90 days | ❌ 2–3 years standard | Simple dissolution |
| SISFS / FFS 2.0 / State schemes | ✅ Most schemes require DPIIT recognition | ❌ Not eligible for most startup-specific schemes | ❌ Not eligible |
| Investor attractiveness | High – signals legitimacy; equity structure ready | Moderate | Low – cannot raise equity funding |
| Compliance burden | Medium (ROC + DPIIT + IMB + GST + FEMA + Labour Codes) | Medium (ROC + GST + Labour) | Low (GST + ITR only) |
When NOT to go the DPIIT startup route: Traditional trading businesses (groceries, textiles, real estate), services businesses without any technology differentiation, or businesses with no plans to raise external equity – DPIIT recognition adds overhead with minimal benefit. A trusted CA can structure the most tax-efficient entity for your business model without the startup label. Consult GCA for entity selection based on your specific business.
17. Common Startup Mistakes That Cost Tax Benefits
| Mistake | Consequence | Prevention |
|---|---|---|
| Registering as OPC / proprietorship | Cannot get DPIIT recognition; no ESOP; no equity fundraising; no §140 ITA 2025 | Incorporate as Pvt Ltd from Day 1; conversion to Pvt Ltd later resets incorporation date |
| Not applying for DPIIT recognition early | Lose early years of 10-year §140 window; miss patent/TM rebates; ineligible for SISFS | Apply within 1 month of incorporation – it’s free, takes 2-5 days, and unlocks all benefits immediately |
| Applying for IMB/§140 AFTER first profitable year has been assessed | §140 exemption not retroactive; profitable years without IMB certificate are taxed – cannot reclaim | Submit IMB application in Year 1 or 2; even if not yet profitable, the certificate is valid from grant date |
| Not filing FC-GPR within 30 days of foreign investment | FEMA contravention; RBI compounding; delays in future funding rounds; due diligence issues | Set a 25-day internal deadline from fund receipt date; file on FIRMS portal immediately |
| Ignoring RCM on foreign platform payments (AWS, Google Ads, Zoom) | 18% IGST demand under §5(3) IGST Act for all past years + interest + penalty under §122 CGST | Register GST in Year 1; set up monthly RCM self-invoice workflow for all foreign vendor payments |
| Missing AOC-4 / MGT-7 annual filing deadlines | ₹100/day per form – no cap; compounds rapidly; DIN issues; due diligence red flags for investors | Set calendar reminders; use professional ROC compliance service; file before 29 November (AOC-4) and 29 November (MGT-7) |
| ESOP not structured under a proper ESOP plan | No 48-month deferral under §17 ITA 2025; tax complications at exercise; disputes with employees at exit | Draft board-approved ESOP plan per §62(1)(b) Companies Act 2013; register ESOP pool in MCA filings; document all grants and vesting schedules |
| Ignoring 50% basic wage rule under Labour Codes | PF liability on higher base; inspector compliance issues once State Rules are notified; retrospective demands possible | Review all CTC structures now; ensure basic wage is ≥50% of total remuneration; update offer letters and payroll software |
| Planning §54GB investment after 1 April 2026 | §54GB NOT in ITA 2025 – LTCG on property → startup equity exemption no longer available | Complete property sale AND startup equity investment before 31 March 2026 to claim under ITA 1961 (FY 2025-26). After that, use §85 (bonds) or §86 (new house) for LTCG planning. |
| Crossing ₹100 crore turnover without planning | Automatically loses startup status mid-year; pending §140 claims may be affected; IMB exemption may lapse | Monitor turnover monthly; begin transition planning at ₹70 crore; convert to regular corporate tax planning proactively with CA |
| Founders not filing personal ITR under correct regime | Old vs new tax regime: founders may lose deductions or pay excess tax | Evaluate §202 ITA 2025 (new regime) vs old regime for each founder individually – the startup’s §140 holiday is for the company; founders’ personal income is a separate consideration |
18. Practical Case Studies
Case 1: SaaS Startup – §140 ITA 2025 Holiday + Labour Code Compliance
CloudOps Pvt. Ltd., Bengaluru. Incorporated April 2022. DPIIT-recognised (June 2022). IMB certification received August 2023. First profitable year: FY 2025-26 (₹80L profit). 25 employees. Foreign VC investment: $1M (Sept 2025).
| Item | ITA 1961 / Old Law | ITA 2025 / New Law (TY 2026-27) |
|---|---|---|
| Tax holiday on ₹80L profit | §80-IAC: 100% deduction → ₹0 income tax | §140, ITA 2025: 100% deduction → ₹0 income tax |
| MAT on ₹80L book profit | §115JB at 15% = ₹12L | §206, ITA 2025 at 15% = ₹12L MAT still payable |
| Loss from FY 2022-24 (₹40L losses) | §79 preserved through VC round | §119, ITA 2025 preserved – no forfeiture despite VC now holding 45% |
| FC-GPR for $1M | File within 30 days on FIRMS portal | Same requirement – file within 30 days |
| CTO’s ESOP perquisite at exercise | §17(2)(vi) – 5-year deferral (startup) | §17, ITA 2025 – 48-month deferral |
| Labour Code – PF base for ₹12L CTC employee | Old rule: Basic ₹4L/year; PF on ₹4L | Code on Wages: Basic must be ≥50% = ₹6L; PF now on ₹6L → higher PF contribution |
Case 2: HNI Property Sale → Startup Investment – §54GB Lapse Impact
Mr. Mehta (Delhi HNI) sold residential property in May 2026 for ₹3.5 crore (purchased 2010 for ₹50L). LTCG (post-indexation): ₹2.2 crore. His nephew runs a DPIIT startup. Mr. Mehta planned to invest in startup to claim §54GB exemption.
Critical Update: §54GB is NOT in ITA 2025. Sale on 1 April 2026 onwards means LTCG of ₹2.2 crore is fully taxable at 12.5% = ₹27.5 lakh LTCG tax. The startup investment route is now closed. Had Mr. Mehta sold before 31 March 2026 and invested within 6 months in the startup, he could have claimed §54GB under ITA 1961 for FY 2025-26.
| LTCG Planning Option (Post April 2026) | Section | Saving |
|---|---|---|
| Invest ₹50L in NHAI/REC bonds | §85, ITA 2025 (= §54EC) | LTCG on ₹50L exempt = ₹6.25L saved (partial) |
| Purchase new residential house from proceeds | §86, ITA 2025 (= §54F) | Full LTCG exempt if entire net consideration invested in 1 new house; lock-in 3 years |
| Invest remaining LTCG amount in startup (no tax benefit now) | N/A — §54GB not in ITA 2025 | ₹0 tax saving from startup investment post April 2026 |
Case 3: Startup Employee ESOP Under ITA 2025 – §17 Deferral in Action
Priya joins HealthAI (DPIIT startup) as Head of Product in 2023. Receives 20,000 ESOPs at ₹1 exercise price. Vests over 4 years (2024-2027). Exercises all in July 2026 when FMV = ₹120/share.
| Item | Non-DPIIT Company (Tax at Exercise) | DPIIT Startup – §17, ITA 2025 (Deferral) |
|---|---|---|
| Perquisite income at exercise (July 2026) | ₹23.8L (20,000 × ₹119); TDS 30% = ₹7.14L due by employer immediately via §393, ITA 2025 | ₹0 TDS at exercise – deferred under §17, ITA 2025 |
| Deferral trigger | N/A | Earliest of: 48 months from July 2026 = July 2030; OR Priya leaves; OR Priya sells |
| HealthAI IPO in Jan 2028; Priya sells 10,000 shares at ₹400 | N/A | Sale = trigger. Perquisite TDS triggered on ₹23.8L at applicable slab. Capital gains: (₹400–₹120) × 10,000 = ₹28L LTCG (if >12 months post-IPO listing) |
| Tax on LTCG | N/A | ₹28L × 12.5% = ₹3.5L under §198, ITA 2025 |
| Net benefit of deferral | N/A | Priya pays perquisite tax at sale when she has cash — solves phantom income problem |
19. Frequently Asked Questions
Q1. Under ITA 2025 (TY 2026-27), which section replaces §80-IAC for the startup tax holiday?
§140 of the Income-tax Act, 2025 is the startup 3-year income tax holiday provision (= §80-IAC of ITA 1961). The substantive benefit is identical – 100% deduction of profits for any 3 consecutive assessment years out of the first 10 years, requiring DPIIT recognition and IMB certification. The incorporation deadline remains 31 March 2030 (Finance Act 2025). For TY 2026-27 ITR filings (July 2027 onwards), claim the deduction under §140 in the applicable schedule. MAT under §206, ITA 2025 (= §115JB) still applies at 15% on book profits even during the §140 holiday.
Q2. I am a property owner planning to sell my flat and invest in my daughter’s DPIIT startup. Can I claim §54GB exemption?
Not from TY 2026-27 onwards. Section 54GB of ITA 1961 has NOT been carried into the Income-tax Act, 2025. For residential property sold on or after 1 April 2026 – there is no provision in ITA 2025 for rolling the LTCG into startup equity for tax exemption. If you completed your property sale before 31 March 2026 AND invest in the startup’s equity within 6 months – you can still claim §54GB under ITA 1961 for FY 2025-26 (filing July 2026). For transactions after 1 April 2026: use §85 ITA 2025 (=§54EC – up to ₹50L in NHAI/REC bonds) or §86 ITA 2025 (=§54F – invest in new house) for LTCG planning. Contact GCA immediately if you are considering a property sale in 2026.
Q3. DIR-3 KYC was annual. What changed and when is my next filing due?
The Companies (Appointment and Qualification of Directors) Amendment Rules, 2025 (MCA Notification G.S.R. 943(E) dated 31 December 2025) changed DIR-3 KYC frequency from annual to once every 3 consecutive financial years, effective 31 March 2026. The due date is 30 June of the relevant (third) financial year. If you filed DIR-3 KYC for FY 2025-26 (by 30 June 2026): your next mandatory KYC is due by 30 June 2028. If your DIN was allotted in FY 2025-26: first KYC due by 30 June 2029. Important: any change in mobile number, email, or address must still be updated within 30 days via DIR-3 KYC Web (event-based) – this does NOT reset the 3-year cycle.
Q4. Our startup has 12 employees – which Labour Codes apply and from when?
All 4 Labour Codes are in force from 21 November 2025. For a 12-employee startup: Code on Wages applies to all employees from Day 1 (minimum wages, bonus, 50% basic wage rule). Code on Social Security: ESIC applies from 10+ employees in notified areas (so ESIC applicable to your startup now – 0.75% employee + 3.25% employer contribution); EPF applies from 20+ employees (not yet applicable at 12). OSH Code: Appointment letters mandatory for all workers; working hours, leave, and safety norms apply. Industrial Relations Code: Full standing orders required only at 300+ employees; retrenchment without permission only up to 300 (so you have freedom). Central and state rules for these codes are being finalised – monitor your state government’s notification for final rule commencement in your state.
Q5. Angel tax is abolished. Do I still need any documentation for my startup’s funding round?
Yes – while §56(2)(viib) angel tax is abolished and not in ITA 2025, §102 of ITA 2025 (= §68 ITA 1961 – unexplained cash credit) remains fully active. For every funding round, maintain: (1) Investor PAN/KYC documentation; (2) Bank statements showing source of investment funds; (3) Board resolution approving the allotment; (4) Valuation report from a SEBI-registered merchant banker or CA using recognised methodology (DCF/comparable companies); (5) Signed subscription agreement with investor. This documentation protects against §102 notices even though angel tax is gone. For foreign investors: additionally maintain FC-GPR filing, pricing compliance evidence, and FEMA documentation.
Q6. We received SISFS grant of ₹20 lakh from an incubator. Is this taxable?
Government grants and subsidies for startups through approved schemes like SISFS are generally not taxable as income under the principle established in Commissioner of Income Tax v. Ponni Sugars (SC): subsidies for capital purpose are not income. However, SISFS grants used for revenue/operational purposes may be treated differently. The safest position: (1) Consult a CA for the specific treatment under ITA 2025; (2) If the startup holds valid §140 (ITA 2025) tax holiday certification – any income during the holiday period (including grants if treated as income) may be covered by the deduction; (3) Grants from central/state government for purchase of capital assets (machinery, equipment) are typically capital receipts – not taxable. Contact GCA for a specific treatment analysis based on the SISFS grant agreement terms.
Startup India Compliance – DPIIT, §140 ITA 2025, ESOP, FEMA & Labour Codes | GCA
GCA provides end-to-end startup compliance: DPIIT recognition application, IMB certification strategy (§140 ITA 2025), ESOP plan structuring, FC-GPR and FEMA filing for funding rounds, GST registration and RCM compliance, ROC/MCA annual filing, Labour Code compliance review, and strategic tax planning for founders. We work with early-stage to pre-IPO startups across India. Pan-India, 100% digital.
📞 +91-9911369185 · ✉️ [email protected] · 🌐 guptachandanassociates.com
Disclaimer: Educational purposes only. Based on DPIIT Startup India Notification (as amended 2025), ITA 1961, ITA 2025 (effective 1 April 2026), Income-tax Rules 2026, Code on Wages 2019, Code on Social Security 2020, OSH Code 2020, Industrial Relations Code 2020 (all effective 21 November 2025), Companies Act 2013, MCA Notification G.S.R. 943(E) dated 31 December 2025 (DIR-3 KYC every 3 years), Finance Acts 2024, 2025 and 2026, FEMA, and IBC as available up to May 2026. ITA 2025 section mapping sourced from income tax portal ITA 2025 Section Mapper. §54GB and §54EE not carried in ITA 2025. Labour Code Central Rules published December 2025 – being finalised; state rules adoption ongoing. Government scheme amounts and deadlines change frequently – verify current parameters on official portals before applying. Consult a qualified professional before any tax filing, FEMA compliance, or business structuring decision.
