Latest Tax Incentives for Startups & MSMEs in 2025

MSMEs

Latest Tax Incentives for Startups & MSMEs in 2025

MSMEs

The Indian government continues its commitment to fostering entrepreneurship and supporting the growth of Micro, Small, and Medium Enterprises (MSMEs). The Union Budget 2025 introduces a range of tax benefits and incentives aimed at reducing financial burdens and encouraging business expansion. This article explores the latest tax incentives designed to support startups and MSMEs in 2025.

1. Extended Tax Exemption for Startups

To further promote innovation and new business ventures, the government has extended the income tax holiday for eligible startups under Section 80-IAC for another year. Startups incorporated until March 31, 2026, can avail themselves of a 100% tax exemption on profits for any three consecutive years within the first ten years of operation.

2. Lower Corporate Tax for MSMEs

Recognizing the importance of small businesses in industrial growth, the government has lowered the corporate tax rate for newly established domestic manufacturing MSMEs. These businesses can now benefit from a reduced tax rate of 15%, down from the standard 25%, thereby lowering the tax burden and promoting industrial expansion.

MSMEs

3. Increased Limits for Presumptive Taxation

To simplify tax compliance for small businesses and professionals, the government has raised the presumptive taxation limits under Sections 44AD and 44ADA:

  • Businesses: Threshold increased from ₹2 crore to ₹3 crore.
  • Professionals: Threshold raised from ₹50 lakh to ₹75 lakh.

This change reduces compliance costs and eases the tax filing process for eligible entities.

4. Enhanced Tax Benefits for Investors

To attract more investments into startups and MSMEs, the government has introduced new investment-friendly measures:

  • Extended capital gains tax exemption (Section 54GB) for investments in eligible startups.
  • Tax rebates for angel investors and venture capitalists funding early-stage startups, fostering a stronger investment ecosystem.

5. Simplified GST Compliance

To ease GST-related burdens, new relaxations have been introduced:

  • Businesses with a turnover of up to ₹5 crore can now file quarterly GST returns instead of monthly filings.
  • Simplified input tax credit (ITC) procedures to improve compliance.
  • Waivers on late fees and penalties for delayed GST filings, reducing the financial strain on small businesses.

6. Tax Perks for Digital & Sustainable Startups

To support digital transformation and sustainable business practices, startups in specific industries receive additional tax benefits:

  • Special tax deductions on research and development (R&D) expenses for green technology and AI-driven businesses.
  • Reduced tax rates for startups in renewable energy, electric mobility, and climate-related sectors, encouraging sustainable business solutions.

7. Better Loan Accessibility & Credit Support

Access to credit has been further facilitated for MSMEs through various initiatives:

  • Increased funding for the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), enhancing financial support.
  • Lower interest rates on business loans under priority sector lending programs.
  • Tax relief on interest paid on business loans, making borrowing more affordable for entrepreneurs.

Read More: Breaking Down Salary Taxation: Taxable vs. Non-Taxable Elements

The 2025 tax reforms offer significant relief to startups and MSMEs by reducing financial constraints, simplifying compliance, and encouraging investment. Entrepreneurs should leverage these new incentives to optimize their tax planning and accelerate their business growth. By utilizing these schemes, startups and MSMEs can strengthen their financial standing and contribute to India’s economic progress.

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        Section 43B(h) : Applicability, Time Limit, Disclosure & External Confirmation for MSE Payments

        Section 43B(h) : Applicability, Time Limit, Disclosure & External Confirmation for MSE Payments

        Section 43B(h) of the Income Tax Act, introduced by the Finance Act 2023, emphasizes timely payments to Micro and Small Enterprises (MSEs) for goods and services. This provision comes into effect on April 1, 2024, and is applicable to payments governed by Section 15 of the MSMED Act, 2006. The primary goal is to ensure that payments to MSEs are cleared within the same financial year, regardless of whether the accounting method used is cash or accrual. Notably, Section 43B(h) is applicable only to manufacturers and service providers, excluding traders.

        Applicability of Section 43B(h)

        Starting from April 1, 2024, businesses are mandated to pay MSEs for their goods and services within the financial year, provided the payments are governed by Section 15 of the MSMED Act, 2006. Payments must be made by the end of the financial year in which the goods or services were accepted.

        It’s important to note that Section 43B(h) only applies to payments made to MSEs classified as manufacturers or service providers. Traders who do not meet these criteria are not covered under this section.

        Effective Date

        Section 43B(h) becomes effective from FY 2023-2024 (Assessment Year 2024-2025), and it will enforce the timely settlement of dues to MSEs starting April 1, 2024.

        Time Limit for Payments to MSEs under Section 43B(h)

        • No payment timeline specified in the contract: If the agreement between the buyer and the MSE does not specify a payment deadline, the buyer must settle the payment within 15 days from the date of acceptance of goods or services.

        • Payment timeline specified in the contract: If the contract specifies a payment deadline, the buyer must pay on or before the earlier of the two:

          • The agreed-upon payment date mentioned in the contract, or
          • 45 days from the date of acceptance of the goods or services.

        Failure to meet these deadlines results in the accrual of compound interest at a rate three times the Reserve Bank of India’s bank rate, as outlined in Section 16 of the MSMED Act, 2006.

        Consequences of Non-Payment and Interest Disallowance

        Under Section 16 of the MSMED Act, if a buyer fails to pay an MSE within the prescribed timeline, they are liable to pay interest at a compounded rate with monthly rests. The interest rate is set at three times the RBI’s bank rate. This interest is payable regardless of any contrary agreement between the buyer and supplier.

        Moreover, Section 23 of the MSMED Act explicitly disallows the deduction of this interest from the buyer’s taxable income under the Income Tax Act, 1961. Thus, the interest paid for delayed payments cannot be treated as a deductible expense while calculating taxable income.

        Disclosure Requirements in Audited Financial Statements

        In line with Section 22 of the MSMED Act, 2006, businesses must provide detailed disclosures in their audited financial statements regarding their transactions with MSEs. These disclosures include:

        • The principal amount and the interest due (to be separately disclosed) remaining unpaid at the end of the financial year.
        • The amount of interest paid to MSEs, along with the payments made beyond the stipulated time.
        • The interest due for delayed payments during the year (paid beyond the due date but without the inclusion of the statutory interest).
        • The interest accrued but unpaid at the year-end.
        • Future interest obligations payable in the succeeding years until the entire outstanding interest is cleared.

        External Confirmation from Suppliers

        To ensure compliance with Section 43B(h) and the MSMED Act, companies may need to obtain external confirmations from MSE suppliers. This can help verify the payment status and reconcile any outstanding dues, ensuring accurate disclosures and compliance with the provisions.

        Read More: Tips for Preparing for a Income Tax Audit

        Section 43B(h) of the Income Tax Act, along with the provisions of the MSMED Act, serves as a critical legal framework to ensure the timely settlement of payments to Micro and Small Enterprises. By enforcing strict payment deadlines and requiring detailed disclosures in financial statements, this section aims to promote transparency and financial discipline among businesses. Companies should remain vigilant about compliance, particularly as the effective date approaches in FY 2023-2024.

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              Startup vs MSME: What’s the Difference?

              Startup vs MSME: What's the Difference?

              The Government of India plays a pivotal role in promoting both Startups and MSMEs (Micro, Small, and Medium Enterprises), recognizing their importance in fostering entrepreneurship and economic growth. However, the distinction between the two can often be confusing for aspiring entrepreneurs. Understanding their legal definitions, purpose, and the support they receive can help budding businesses choose the right path.

              1. What is a Startup?

              A Startup is typically focused on developing innovative, repeatable, and scalable business models. The key characteristic of a startup is its aim to bring about technological advancements, improve productivity, and create employment opportunities.

              Legal Definition of Startup (as per the Ministry of Commerce and Industry, Govt. of India):

              • Incorporation: The entity must be registered as a Private Limited Company (PLC), Partnership Firm, or Limited Liability Partnership (LLP).
              • Turnover: The entity’s turnover should be less than Rs. 100 crore in any of the previous financial years.
              • Age: An entity is recognized as a startup for up to 10 years from the date of incorporation.
              • Purpose: The startup must focus on innovation, improvement of products, services, or processes with the potential to generate employment or wealth. Any entity created by splitting or restructuring an existing business will not be considered a startup.

              Startups are known for their disruptive ideas—solutions that improve how industries operate, influence consumer behavior, and even impact societal trends.

              2. What is an MSME?

              On the other hand, an MSME is more traditional in nature, focusing on providing known products or services to local markets. MSMEs are usually independently owned and operated businesses that prioritize profitability and stability over rapid scaling.

              MSME Classifications:

              • MSMEs in India are categorized into two types:

                • Manufacturing Enterprises: These are involved in producing goods or products. The investment in plant and machinery ranges between Rs. 0 to Rs. 10 crore.
                • Service Enterprises: These are engaged in providing services. The investment in equipment ranges between Rs. 0 to Rs. 5 crore.

              Registration and Benefits for MSMEs:

              To receive the benefits offered by the government, businesses need to register as an MSME. The Ministry of Commerce supports MSMEs by providing access to:

              • Skill development and training programs
              • Medium and long-term loans
              • Working capital loans
              • Seed loans and bridge loans

              These benefits are aimed at nurturing smaller enterprises by offering financial assistance and support in building capacity, upgrading technology, and sustaining business growth.

              Key Differences Between Startup and MSME

              AspectStartupMSME
              PurposeFocuses on innovation and scalable business modelsFocuses on providing known products/services to local markets
              Growth PotentialHigh-risk, high-reward with fast scalabilitySteady growth with stable operations
              Legal StructurePrivate Limited, LLP, or Partnership FirmVaries, but usually smaller independent ownership
              Age LimitRecognized for up to 10 yearsNo specific time limit
              Turnover LimitLess than Rs. 100 croreVaries based on investment (Rs. 0 to Rs. 10 crore)
              Innovation FocusMust work towards innovation or improvementInnovation is not a primary requirement
              Government SupportFocused on promoting innovation and scalabilityFocused on providing financial assistance and stability

              How to Start and Get Recognition?

              For Startups:

              To be recognized as a startup by the Government of India:

              1. Incorporate your business as a Private Limited Company, LLP, or Partnership Firm.
              2. Ensure your annual turnover is below Rs. 100 crore.
              3. Register through the Startup India portal to gain access to benefits like tax exemptions, intellectual property services, and government funding opportunities.
              4. The startup must be focused on developing innovative solutions or improving existing ones.

              For MSMEs:

              • MSMEs need to register through the Udyam Registration portal to get an official recognition.
              • MSMEs benefit from a wide range of schemes that help in acquiring long-term loans, working capital loans, and access to subsidies for technological upgrades.
              • Depending on the sector, MSMEs can also avail training, skill development, and advisory services provided by the government.

              Securing Loans and Financial Assistance

              For Startups:

              Startups often rely on external funding sources such as:

                • Angel Investors and Venture Capitalists (VCs) who provide seed funding in exchange for equity.
                • Government Grants and incentives under schemes like Startup India Seed Fund Scheme.
                • Bank Loans: Startups may also seek loans through traditional banking channels or special startup-focused programs.

              Read More: Resolving Income Tax Disputes with the New e-Dispute Resolution Scheme (e-DRS)

              For MSMEs:

              MSMEs have access to multiple financial assistance programs such as:

                • Bank Loans: MSMEs can apply for loans through banks under the MSME Credit Guarantee Scheme.
                • Subsidized Loans: The government provides subsidized interest rates on loans for MSMEs under various schemes.
                • Schemes like CGTMSE (Credit Guarantee Fund Trust for Micro and Small Enterprises) offer collateral-free loans for eligible MSMEs.

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