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Amendment and Benefit to eligible ‘Start-Ups’ under Finance Bill 2020 (Applicable from Assessment Year 2021-22)

Turnover Limit to Claim Deduction under Section 80-IAC has been Increased .

(Applicable from Assessment Year 2021-22]

Section 80-IAC of the Act was introduced by the Finance Act, 2016 to provide for deduction in respect of profits and gains derived by an eligible start-up. At present, Section 80-IAC provides that for claiming tax holiday, the turnover of an eligible start-up should not exceed Rs. 25 crores in the previous year relevant to the assessment year for which deduction under this section is claimed. The Finance Bill proposed to raise the turnover limit for claiming such exemption to Rs. 100 crore. Such an increase in the turnover limit to claim deduction under section 80-IAC brings this provision in parity with the threshold limit specified in the notification issued by the DPIIT.

Window to Claim Deduction under Section 80-IAC has been Increased to 10 years

[Applicable from Assessment Year 2021-22]

The Finance Bill proposes to provide deduction under section 80-IAC to eligible start-up for a period of 3 consecutive assessment years out of 10 years beginning from the year in which the eligible start-up is incorporated. Earlier, this deduction was available for 3 consecutive financial years out of the first 7 years.
A start-up generally takes 5-10 years to start earning the profits. The decision to provide an option to a start-up to claim deduction under Section 80-IAC for 3 years out of 10 years is a welcome change. If a start-up starts earning profit after 5 years, previously it could claim deduction only for two years and now it can claim a deduction for 3 years and such deductions will be higher as profits in later years will generally be more.

No Withholding Tax at the time of exercising ESOP by an employee of the eligible Start-Up

[Applicable from Assessment Year 2020-21]

Start-ups generally remunerate and retain their talented employee by giving them ESOP’s or Sweat Equity. These options stocks are perquisites in hand of the employees at the time of exercise and taxable under the head salary. Therefore, the employers are required to deduct the tax at the time these options are exercised. This provision is a burdensome for the employees as it reduces the cash flow in their hand and they do not get any immediate benefit from the shares allotted under the ESOPs. To reduce the burden of taxes, the deduction of withholding tax and payment of tax on such income has been deferred to the earlier of the following period:

  1. On the expiry of 48 months from the end of Assessment year in which ESOPs are exercised;

  2. At the date the assessee ceases to be the employee of the organization; or

  3. At the date of sale of shares allotted under ESOP.

In other words, the income from allotment of shares under ESOPs shall arise in the year itself in which the option is exercised, however, the payment of tax or deduction of tax at source, as the case may be, is deferred to the subsequent period.

Consequential amendments have also been proposed in Section 140A (self-assessment tax), Section 191 (direct payment of tax by the employee) and Section 156 (notice of demand). Thus, the employers are not required to deduct tax from the income in the nature of perquisites arising from ESOPs and the employees are not required to pay tax during the previous year or at the time of filing of return. When the liability arises to pay the tax it shall be payable within 14 days from the happening of any the following period (whichever is earlier):

  1. On the expiry of 48 months from the end of Assessment year in which ESOPs are exercise &

  2. At the date the assessee ceases to be the employee of the organization; or

  3. At the date of sale of shares allotted under ESOP.

‘TDS Provisions’ applicable on Distribution of ‘Dividend Income’ or ‘Income on Units’ from Assessment Year 2021-22
‘TDS Provisions’ applicable on Distribution of ‘Dividend Income’ or ‘Income on Units’ from Assessment Year 2021-22 Tax Amendments in Finance Bill 2020 Amendments of 'Tax Deductions and Exemptions' in Finance Bill 2020 [ Applicable from Assessment Year 2021-22]
Income Tax Slab for Financial Year 2020-21 (AY : 2021-22)

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