For Startups

You need a private limited company or LLP, incorporated on or after 1 April 2016, with DPIIT Startup India recognition and an eligible business — not formed by splitting or reconstructing an existing business. Annual turnover must not exceed ₹100 crore (raised from ₹25 crore by Finance Act 2021). The deduction is 100% of profits from the eligible business for any three consecutive years within the first ten years from incorporation (s.80-IAC). DPIIT recognition alone does not grant the holiday — a separate 80-IAC application through the Startup India portal is required.

No for shares issued on or after 1 April 2025: the Finance (No. 2) Act 2024 omitted s.56(2)(viib) with effect from that date, so angel tax no longer applies to any new share issuance. A SAFE is not equity at issuance in any case — the s.56(2)(viib) test attached to the share-issuance event, so a SAFE converting after 1 April 2025 escapes the provision entirely. For shares issued before that date, the Finance Act 2023 framework governs: DPIIT-recognised startups were exempt where the investor was a notified entity (Notification S.O. 4017(E), 19 September 2023, effective from 1 April 2023), and the rest of the market used Rule 11UA valuation.

At exercise. The difference between the fair market value at exercise and the exercise price is a perquisite taxable as salary in the year of exercise (s.17(2)(vi); TDS under s.192). Grant and vesting are not taxing events. For eligible startups — DPIIT-recognised, within the incorporation window, turnover not exceeding ₹100 crore — TDS on the perquisite is deferred: the employer pays within 14 days of the earliest of 5 years (60 months) from the end of the financial year of allotment, the employee selling the shares, or cessation of employment (s.192(1C), inserted by Finance Act 2020, extended to 60 months by the Finance (No. 2) Act 2024). The eventual sale is capital gains — s.112A for listed shares (12.5% above ₹1.25 lakh) or s.112 for unlisted.

Generally yes, where the sector permits 100% FDI under the automatic route. The FEMA (Non-debt Instruments) Rules, 2019 allow up to 100% foreign ownership in most sectors without prior government approval, subject to sectoral caps, conditionalities and the FDI pricing guidelines; restricted sectors (defence, media, insurance, multi-brand retail and others) carry caps or approval requirements. The allotment must be reported in Form FC-GPR within 30 days (Regulation 4, FEM (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 — FEMA 395/2019).

Form FC-GPR must be filed with the Authorised Dealer bank within 30 days from the date of issue of the equity instruments (Regulation 4(1), FEMA (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019). There is no extension route for the deadline. A delayed or missed filing is a contravention of FEMA, and the standard remedy is compounding — an application to the RBI under s.15 FEMA with a monetary penalty set by RBI guidelines, which can run into lakhs depending on the amount involved and the period of delay.

s.194R (inserted by Finance Act 2022, effective 1 July 2022) requires any person providing a benefit or perquisite to a resident — where the benefit arises from the recipient’s business or profession — to deduct TDS at 10% of its value, once the aggregate value of benefits to that recipient exceeds ₹20,000 in a year. A founder receiving a benefit from their own company, or from a vendor, distributor or business partner, is the recipient; the provider deducts. Benefits already covered by salary TDS (s.192) and genuinely personal gifts are outside the section.

Not for s.56(2)(viib) purposes where the startup is DPIIT-recognised and the investor is a notified entity (S.O. 4017(E), 19 September 2023) — and not at all for shares issued on or after 1 April 2025, since the provision was omitted by the Finance (No. 2) Act 2024. Outside those facts, s.56(2)(viib) in its pre-abolition form taxed the excess of issue price over fair market value as income, with FMV computed under Rule 11UA — broadly the higher of book value and DCF, with additional methods recognised for share issuances from 2023. Even where the provision no longer applies, a contemporaneous valuation remains prudent for investor pricing, the financial statements, and the next round.

Compulsorily convertible preference shares (CCPS) are equity instruments: they rank ahead of ordinary equity on liquidation, carry a preference, convert into equity on a fixed ratio, and pay dividends rather than interest. Compulsorily convertible debentures (CCDs) are debt until conversion: interest is payable — tax-deductible for the company, subject to thin-capitalisation under s.94B where the lender is a non-resident associated enterprise — and must be serviced regardless of profitability. For FDI, both are treated as equity investment where fully and mandatorily convertible (FEMA NDI Rules, 2019), and both are reported in Form FC-GPR. For tax, conversion of CCDs into shares is not a transfer under s.47(xa), and the pre-2025 s.56(2)(viib) applied to shares only, not debentures — a distinction that shaped many seed structures before 1 April 2025.

Not automatically. Section 79, Income-tax Act 1961 restricts carry-forward of losses in a closely held company where the persons holding at least 51% of voting power on the last day of the year the loss was incurred no longer hold that power on the last day of the carry-forward year. Each priced funding round can dilute the original holders below 51%, triggering the restriction and permanently forfeiting pre-round losses. A proviso protects startup companies (as referred to in s.80-IAC) if all shareholders who held voting power in the loss year continue to hold it — making founder continuity, ESOP pool structuring, and the sequence of share allotments a tax decision, not just a governance one. Model the s.79 impact before you sign a term sheet: the losses that survive (or don't) shape the effective tax rate for the next several profitable years.

Yes, but the structure carries three tax layers. First, royalty paid by the Indian company is income deemed to accrue or arise in India (s.9(1)(vi)): the payer withholds under s.195 read with s.115A at the domestic rate or the DTAA rate, with Form 15CA/15CB certification. Second, the royalty is an international transaction under Chapter X — it must be at arm’s length under s.92B/92C, supported by transfer-pricing documentation under Rule 10D with Form 3CEB filed by 30 November. Third, the holding entity needs commercial substance: a shell IP company with no people, functions or decision-making invites transfer-pricing adjustment, GAAR review under s.95, and attribution of the royalty income to India. The Indian company can deduct arm’s-length royalties, but the deduction fails under s.40(a)(i) if the withholding tax is not deposited.