RBI redefines “startup” vide Foreign Exchange Management (Fourth Amendment) Regulations, 2024

Introduction

According to a recent notification dated 19^th November 2024, the Reserve Bank of India has notified to amend the Foreign Exchange Management (Foreign Current Accounts by a Person Resident in India)(Fourth Amendment) Regulations 2024. Through this amendment, the Reserve Bank has substituted the explanations to Regulation 5 and para 1 (vii) of Schedule I in the 2015 regulation in order to add that a ‘startup’ is an entity which is recognized as a startup by the department for Promotion of Industry and Internal Trade.

According to the previous definitions of ‘startup’, it refers to an entity which has complied with the terms and conditions as laid down by the Department of Industrial Policy and Promotion under the Ministry of Commerce and Industry.

Impact of the Notification

1. Expansive Definition of Startups – Under the present definition, Private Limited Companies, Partnerships and LLPs are now eligible to be qualified as startups for 10 years post their incorporation up to a maximum period of 5 years. Additionally the turnover threshold limit for such entities has also been increased to Rs. 100 Crores from erstwhile 25 Crores.
2. Exemptions under Income Tax – Under Section 80 – IAC startups are allowed to deduct 100% of their profits for a period of 3 consecutive years. Moreover, under the angel tax relief, startups which fulfill the criteria laid down such as recognition by DPIIT, paid up capital and share premium post issue not exceeding Rs. 25 Crores etc., are exempted from Section 56(2)(viib) which taxes excess share premiums.
3. Cessation of ‘startup’ – under the present rules laid down by the notification, an entity ceases to be a startup once it crosses Rs. 100 Crore turnover or 10 years of existence, whichever is earlier.
4. The startups intending to qualify for benefits should necessarily obtain a startup certification from DPIIT in order to avail tax reliefs.

Conclusion

The present notification by the DPIIT is an advanced step towards easing the startup norms in order to provide a liberalized startup definition wherein more entities can be eligible to focus on innovation, development and scalability where they can potentially improve their wealth creation and create more employment opportunities.

The tax reliefs which would be provided under the present expansive and elaborative definition would enable the startups to foster growth and profitability in their business operations along with sustainable growth and efficient management of finances. Moreover, extended tenures and financial thresholds would also assist the entities to scale up their operations leading to an increased investor confidence along with improved ease of doing business and clarity in regulations and operations for the startups.