Impact of Budget 2025-26 on Small Businesses & Startups: Exploring Tax Benefits, FDI Changes, and Government Incentives

Introduction

The Union Budget 2025-26 has introduced several key reforms aimed at boosting small businesses (MSMEs) and startups. With an emphasis on reducing tax burdens, enhancing ease of doing business, attracting foreign investments, and providing financial assistance, this budget aims to foster entrepreneurship and drive economic growth.

In this blog, we explore the major provisions of the budget, focusing on tax benefits, changes in foreign direct investment (FDI) policies, and government incentives specifically designed for small businesses and startups.

1. Tax Benefits for Small Businesses & Startups

One of the most anticipated aspects of Budget 2025-26 was the tax relief measures introduced to ease the financial burden on MSMEs and startups.

1.1 Lower Corporate Tax for MSMEs & Startups

To enhance profitability and encourage reinvestment, the corporate tax rate for small businesses has been reduced:

For MSMEs (Annual Turnover < INR 50 crore): Corporate tax reduced from 22% to 18%.
For Startups (Registered under Startup India Scheme): Tax holiday extended from 3 years to 5 years.
For Newly Incorporated Companies (from April 2025): Tax rate cut to 15% if they commence operations within the next 2 years.

1.2 GST Simplification & Compliance Ease

Quarterly GST Filing for Small Businesses: MSMEs with turnover under INR 5 crore can now file GST returns quarterly instead of monthly.
Exemption Limit Raised: GST exemption for small businesses has been raised from INR 20 lakh to INR 40 lakh.
Easier Input Tax Credit (ITC) Claims: Startups in technology and manufacturing sectors can claim ITC more efficiently under the revised GST rules.

1.3 Capital Gains Tax Benefits

Long-Term Capital Gains (LTCG) Tax Reduction: Startups can now enjoy a lower 8% LTCG tax (previously 10%) on equity investments exceeding INR 1 lakh.
Exemption on Investment in Startups: Investors reinvesting capital gains in eligible startups will get tax exemptions under Section 54GB.

2. Changes in Foreign Direct Investment (FDI) Policies

The government has introduced major reforms in FDI policies to attract foreign investors and boost the startup ecosystem.

2.1 Increased FDI Limits for Startups

FDI in Fintech & E-commerce Startups: 100% FDI under the automatic route allowed in fintech and e-commerce startups.
Higher Investment Cap for Small Enterprises: The FDI cap for small enterprises in the manufacturing sector has been increased from 49% to 74%.
Relaxed Regulations for Foreign Investors: A simplified approval process has been introduced for foreign investors to ease entry into Indian markets.

2.2 Government-Backed Foreign Investment Initiatives

Startup India Global Connect Initiative: Encourages foreign angel investors and venture capitalists to fund Indian startups with minimal regulatory barriers.
Single-Window Clearance for Foreign Investors: A new digital portal launched to speed up the FDI approval process.

3. Government Incentives for Small Businesses & Startups

The budget has allocated significant funds to support MSMEs and startups through government schemes and financial assistance.

3.1 Increased Credit Access & Loan Subsidies

Expansion of the Credit Guarantee Scheme: MSMEs will get collateral-free loans up to INR 5 crore, reducing financial constraints.
Lower Interest Rates on Startup Loans: Government-subsidized loans with interest rates starting at 5% per annum.
Women Entrepreneur Fund: Special funding support of INR 10,000 crore allocated to women-led startups.

3.2 Expansion of Startup India Seed Fund

INR 2,500 crore added to the Startup India Seed Fund to provide early-stage funding to innovative startups.
Grants & Equity Funding: Startups focusing on AI, healthcare, and renewable energy to receive equity-based seed funding.

3.3 Digital Transformation & Infrastructure Support

5G & AI Development Grants: Tech startups can avail government-backed AI & 5G research grants.
Special Economic Zones (SEZ) for Startups: New startup-exclusive SEZs will be developed in Delhi, Bengaluru, and Hyderabad.

3.4 Incentives for Green & Sustainable Startups

Tax Rebates for Green Startups: Startups working in renewable energy and sustainability sectors to get 100% tax exemption for the first 5 years.
EV & Solar Panel Startups: Increased funding under Faster Adoption and Manufacturing of Electric Vehicles (FAME) Scheme.

4. Impact on Key Industries

4.1 IT & Tech Startups

Lower corporate tax, GST exemptions, and AI/5G grants will boost India's software and AI-driven startups.
Blockchain-based fintech startups will see increased funding and regulatory ease.

4.2 Manufacturing & MSMEs

Increased FDI caps and relaxed regulations will encourage foreign investors in small-scale manufacturing.
Lower taxation will enable MSMEs to reinvest profits into expansion and automation.

4.3 Agriculture & Agri-Tech Startups

Subsidies for precision farming and agri-tech innovations will drive growth in the sector.
Rural startups will benefit from tax exemptions and increased credit availability.

5. Challenges & Potential Roadblocks

5.1 Implementation of FDI Reforms

Regulatory bottlenecks and bureaucratic delays could slow down the FDI reforms' effectiveness.

5.2 Awareness & Accessibility of Incentives

Many small businesses and startups might face challenges in accessing government schemes due to lack of awareness.

5.3 Economic Uncertainty & Global Factors

Global economic fluctuations and inflationary pressures could impact foreign investment in Indian startups.

6. Frequently Asked Questions (FAQs)

Q1. How will the new tax reforms impact small businesses?

The reduced corporate tax and GST compliance ease will lower financial burdens and improve cash flow for MSMEs.

Q2. What are the new FDI policies for startups?

100% FDI is now permitted in fintech and e-commerce startups, and investment caps in manufacturing have been increased to 74%.

Q3. How can startups avail government incentives under the budget?

Startups can apply for tax exemptions, seed funding, and subsidized loans through the Startup India and MSME portals.

Q4. Will MSMEs get easier access to loans?

Yes, the expansion of the Credit Guarantee Scheme allows MSMEs to avail collateral-free loans up to INR 5 crore.

Q5. How does the budget support women entrepreneurs?

A dedicated Women Entrepreneur Fund worth INR 10,000 crore has been introduced to support female-led startups.

Q6. Are there specific incentives for green startups?

Yes, green startups get tax exemptions, subsidies under the FAME scheme, and government-backed funding.

Q7. What challenges do small businesses face in implementing budget reforms?

Regulatory hurdles, lack of awareness, and global economic conditions could impact the smooth implementation of these reforms.

Conclusion

The Budget 2025-26 brings a wave of positive reforms for small businesses and startups in India. From reduced taxes and increased FDI opportunities to enhanced credit access and government-backed incentives, the measures are designed to strengthen the startup ecosystem and drive economic growth.

However, proper implementation and awareness will be key to ensuring that these benefits reach businesses effectively. As India moves towards a more business-friendly environment, small businesses and startups must leverage these opportunities to scale their operations and contribute to the country's economic expansion.

By staying informed and actively engaging with the available schemes, startups and MSMEs can make the most of the 2025-26 budget and thrive in a competitive landscape.