FLA Return 2026: Due Date, Applicability, FLAIR Filing Process, Late Fee, Penalties & RBI Compliance

 By CA Surekha Ahuja

The due date for FLA Return 2026 is approaching, and many companies, LLPs, startups and foreign-invested entities continue to ask a common question:

"Do we need to file FLA Return even though no foreign investment transaction took place during the year?"

In many cases, the answer is Yes.

This is because the Foreign Liabilities and Assets (FLA) Return is a position-based annual FEMA reporting requirement. The reporting obligation depends primarily on the existence of reportable foreign assets or foreign liabilities as on 31 March 2026, and not merely on whether a fresh FDI or ODI transaction occurred during FY 2025-26.

FLA Return 2026 – Executive Summary

Particulars	Details
Return	Foreign Liabilities and Assets (FLA) Return
Regulator	Reserve Bank of India (RBI)
Reporting Date	31 March 2026
Due Date	15 July 2026
Filing Portal	FLAIR Portal
Audit Pending	Provisional Filing Permitted
Revised Filing	Permitted after finalisation of accounts, where required
Late Submission Fee (LSF)	₹7,500 per delayed return
Key Trigger	Reportable Foreign Assets or Foreign Liabilities outstanding on 31 March 2026

What Is FLA Return?

The Foreign Liabilities and Assets (FLA) Return is RBI's annual FEMA reporting requirement designed to capture India's foreign investment position and external sector statistics.

Unlike FC-GPR, FC-TRS or other transaction-based FEMA filings, FLA Return reports the foreign assets and foreign liabilities outstanding as on the reporting date.

Broadly, it covers:

Foreign Liabilities	Foreign Assets
Foreign Direct Investment (FDI)	Overseas Direct Investment (ODI)
Foreign ownership interests	Overseas subsidiaries
Other reportable liabilities towards non-residents	Overseas joint ventures and other reportable foreign assets

The return is filed electronically through RBI's Foreign Liabilities and Assets Information Reporting (FLAIR) System.

The Golden Rule of FLA Compliance

Wrong Question

❌ Did we receive FDI or make ODI during FY 2025-26?

Correct Question

✅ Did any reportable foreign asset or foreign liability remain outstanding on 31 March 2026?

This single test resolves most applicability issues.

Who Should Evaluate FLA Applicability?

Position as on 31 March 2026	FLA Review Required?
Foreign shareholder continues to hold investment	✔ Yes
FDI remains outstanding	✔ Yes
ODI remains outstanding	✔ Yes
Overseas subsidiary or JV exists	✔ Yes
Foreign asset appears in books	✔ Yes
Foreign liability appears in books	✔ Yes
No foreign exposure remains	Generally No

Compliance Alert

Many entities incorrectly assume that no fresh FDI or ODI during the year means no FLA filing.

FLA is a position-based return, not merely a transaction-based return. Historical foreign investments may continue to trigger reporting obligations even when no transaction has occurred during the year.

When Is FLA Return Generally Not Required?

Situation	Likely Position
No foreign shareholder	Generally No Filing
No ODI or overseas investment	Generally No Filing
No foreign asset reflected in books	Generally No Filing
No foreign liability reflected in books	Generally No Filing
No reportable foreign exposure as on 31 March 2026	Filing may generally not be required

FDI vs ODI – Quick Understanding

Particulars	FDI	ODI
Investment Flow	Into India	Outside India
Reporting Character	Foreign Liability	Foreign Asset
Example	Foreign investor in Indian company	Indian company investing abroad

Practical Rule

• Money coming into India generally creates a foreign liability.
• Money invested outside India generally creates a foreign asset.

Both may require examination for FLA reporting purposes.

FLA Return Due Date 2026

Particulars	Date
Reporting Date	31 March 2026
Filing Due Date	15 July 2026

Businesses should ideally begin FEMA review and data compilation well before the due date.

Audit Not Completed Before 15 July?

Do not wait for audit completion.

RBI permits filing on provisional figures where audited accounts are not available by the due date.

Situation	Action
Audit completed	File audited figures
Audit pending	File provisional figures
Audited figures differ later	Revise the return, where necessary

Practical Tip : Missing the due date because audit is pending is one of the most common compliance mistakes.

FLAIR Registration & Filing Process

Filing Ladder

Register Entity
↓
Upload Verification Documents
↓
Receive Login Credentials
↓
Complete FLA Return
↓
Validate Data
↓
Submit Return
↓
Download Acknowledgement

Documents Commonly Required

Document	Purpose
Verification Letter	Entity verification
Authority Letter	Authorised filing
PAN of Entity	Identification
CIN / LLPIN	Registration validation
PAN of Authorised Person	User authentication
Email ID and Mobile Number	OTP verification

Information Reported in FLA Return

Section	Information Covered
Section I	Entity Details
Section II	Financial Information
Section III	Foreign Liabilities
Section IV	Foreign Assets

The reporting typically includes capital structure, reserves, foreign ownership, overseas investments and related financial information.

Most Common FLA Reporting Errors

Mistake	Risk
Assuming no fresh FDI means no filing	Missed compliance
Ignoring historical foreign investments	Incorrect non-filing
Reporting only current-year transactions	Incomplete reporting
Wrong classification of foreign assets/liabilities	Data mismatch
Failure to revise provisional data	Reporting inconsistency
Ignoring overseas subsidiaries/JVs	Under-reporting
Not preserving acknowledgement	Documentation issues

Professional Note

Many missed FLA filings come to light during:

• Investor due diligence
• FEMA reviews
• Fundraising transactions
• Mergers & acquisitions
• Overseas expansion projects
• Regulatory inspections

What appears insignificant today may require explanation years later.

Share Application Money – Handle Carefully

Do not automatically assume that share application money is:

✔ Always reportable, or

✔ Never reportable.

The treatment depends upon:

• Nature of instrument
• Status of allotment
• Applicable RBI reporting framework
• Position as on 31 March 2026

Where doubt exists, professional review is advisable before finalising the return.

Penalties for Non-Compliance

Immediate Consequence

Default	Consequence
Delayed Filing	Late Submission Fee (LSF) of ₹7,500 per return

FEMA Consequences in Appropriate Cases

Nature of Contravention	Potential Exposure
Amount Quantifiable	Up to three times the amount involved
Amount Not Quantifiable	Up to ₹2 lakh
Continuing Contravention	Additional penalties may apply

Compliance Escalation Path

Missed Due Date
↓
LSF (₹7,500)
↓
Continued Non-Compliance
↓
Regulatory Follow-Up
↓
Potential FEMA Consequences

The Late Submission Fee mechanism should not be viewed as a substitute for compliance.

FLA Return 2026 Compliance Checklist

Before 15 July 2026, ensure that:

□ Foreign investment position has been reviewed.

□ Overseas investments have been identified.

□ Foreign assets and liabilities have been reconciled.

□ FLA applicability has been evaluated.

□ FLAIR login credentials are active.

□ Return has been filed.

□ Acknowledgement has been downloaded and preserved.

Quick FAQs

Question	Answer
Due date for FLA Return 2026?	15 July 2026
Audit pending?	File provisionally
No fresh FDI during year?	Filing may still be required
LLP covered?	Yes, where reportable foreign exposure exists
Proof of filing?	FLAIR acknowledgement
Late filing fee?	₹7,500

Conclusion

FLA Return is one of the most frequently overlooked FEMA compliances because businesses often focus on transactions while RBI focuses on positions.

The determining factor is not whether foreign investment was received during FY 2025-26. The determining factor is whether any reportable foreign asset or foreign liability remained outstanding on 31 March 2026.

Accordingly, companies, LLPs, startups and foreign-invested entities should review their balance sheets from a FEMA perspective, assess applicability well before 15 July 2026, file on provisional figures where necessary, and preserve the acknowledgement as evidence of compliance.

No fresh FDI does not necessarily mean no FLA Return.

Where no reportable foreign assets or foreign liabilities exist as on 31 March 2026, FLA filing may generally not be required.

The balance sheet as on 31 March 2026 usually holds the answer

GST on Forfeiture of Token Money in a Proposed Lease

 By CA Surekha Ahuja

Whether Retention of Earnest Money Constitutes a Taxable Supply Under GST

A landlord forfeits a token deposit when a proposed lease falls through. Is that GST?

It's a scenario that plays out constantly in commercial real estate: a prospective tenant pays a token amount during negotiations, the deal collapses before the lease is ever signed, and the landlord keeps the money. The tenant's accountant asks the obvious question — does GST apply to this forfeiture? The landlord's accountant, unsure, often defaults to caution and charges GST "just to be safe."

That caution is frequently misplaced. The answer, in most such cases, is no. GST is a tax on supply, not on every rupee that changes hands or every commercial disappointment. Whether a forfeited token amount attracts GST depends entirely on what that money actually represents — and the answer can differ sharply depending on a handful of factual details that are easy to overlook.

Executive Summary

One of the most misunderstood areas under GST is the taxability of forfeited advances, token money, earnest money deposits, and cancellation-related receipts.

Where no lease deed is executed, possession is never handed over, tenancy never commences, and the amount represents forfeited earnest money due to failure of the proposed transaction, the stronger legal position is that such forfeiture falls outside the scope of GST.

However, where the amount instead represents a cancellation charge, termination fee, or consideration for permitting withdrawal from an existing arrangement, GST implications can arise. The distinction is subtle but extremely important — and it turns on facts and drafting, not on labels.

Understanding the GST Trigger: Section 7

Before examining forfeiture, one must first determine whether a taxable supply exists at all. Section 7 of the CGST Act, 2017 provides that GST applies only where three elements are simultaneously present:

Requirement	Meaning
Supply	Goods or services must actually be supplied
Consideration	The supply must be made against consideration
Business Nexus	The supply must be in the course or furtherance of business

If any one of these elements fails, GST cannot arise. So the real question is never "was money retained?" It is: was money retained as consideration for a supply?

What Counts as Consideration: Section 2(31)

Section 2(31) of the CGST Act defines "consideration" to include payments made for a supply, payments made in response to a supply, and payments made to induce a supply. The retained amount must therefore have a direct nexus with an identifiable supply — a mere commercial loss, compensation, damages award, or forfeiture does not automatically qualify as consideration just because money moved from one party to another.

The Most Misused Provision: Schedule II, Entry 5(e)

Tax authorities frequently reach for Entry 5(e) of Schedule II, which deems certain acts to be a supply of services: agreeing to refrain from an act, to tolerate an act or situation, or to do an act. This is the provision invoked to argue that a cancellation charge, exit fee, or "compensation" is really payment for a service — the service of letting someone off the hook. It covers situations such as cancellation facilities, early-exit arrangements, non-compete agreements, contractual permissions, and tolerance arrangements specifically agreed between the parties.

But the provision cannot be stretched to cover every contractual breach. If every breach were treated as a taxable supply, virtually every damages claim in commercial life would become liable to GST — an interpretation the legislature never intended. Many forfeitures are simply compensatory: money kept because a deal failed, not because a service was rendered.

CBIC's Clarification: Circular No. 178/10/2022-GST

The clearest official guidance on this point is CBIC Circular No. 178/10/2022-GST, dated August 3, 2022, which addresses the taxability of liquidated damages, penalties, compensation, and forfeitures. The Circular draws a clear line between two categories of receipt that look similar on the surface but are treated very differently.

Category A — amounts received as consideration for a facility or benefit. Examples include cancellation charges, early-termination charges, exit fees, and postponement charges. These are generally taxable, because the supplier is providing an independent contractual facility in exchange for the payment.

Category B — amounts received as compensation for breach or non-performance. Examples include liquidated damages, contractual penalties, earnest money forfeiture, and bid security forfeiture. These generally do not constitute consideration for any supply.

Crucially, the Circular specifically recognizes that earnest money may be forfeited to discourage non-serious participants, and that such forfeiture does not automatically amount to a taxable supply. This significantly weakens any argument that every forfeiture represents "toleration of an act."

Supreme Court Principles: Satish Batra v. Sudhir Rawal

Although decided under contract law rather than GST law, the Supreme Court's reasoning in Satish Batra v. Sudhir Rawal remains highly relevant. The Court held that earnest money serves as security for performance, that forfeiture is permissible where contractual conditions are satisfied, and — importantly — that earnest money is distinct from an ordinary advance payment toward price.

That distinction carries over neatly into the GST analysis:

Feature	Earnest Money	Advance / Part-Payment
Security for performance	Yes	No
Paid as commitment to complete the transaction	Yes	Often
Forms part of the eventual transaction value	No	Yes
Can be forfeited upon default	Yes	Rarely framed this way
Adjusted against rent or price once supply occurs	No	Yes
Generally consideration for a service	No	Potentially yes

Money paid as a pledge of performance, and forfeited because the deal fell apart, looks like compensation for breach. Money that forms part of the transaction value, or is paid as a fee for the privilege of walking away, looks far more like consideration for a supply.

Applying This to a Real Lease Negotiation

Consider a common fact pattern:

Particulars	Position
Token money paid	₹50,000
Lease deed executed	No
Possession handed over	No
Tenancy commenced	No
Rent became payable	No
Amount retained	Yes

On these facts, no renting service ever came into existence. There was no transfer of possessory rights, no right to occupy, no enjoyment of premises, and no supply of renting services — and therefore no principal supply on which GST could be levied. The ₹50,000 is best read as earnest money or a token advance, forfeited because the proposed transaction itself failed, not as a fee charged for a cancellation facility on an otherwise live lease. The forfeiture simply reflects the commercial consequences of a failed negotiation.

Seven Scenarios, Seven Different Answers

The same word — "forfeiture" — can describe transactions with very different GST consequences.

1. Negotiation stage only — no deed, no possession. The strongest case for non-taxability. The transaction never matured into a supply of renting services.

2. Lease deed signed, but possession never handed over. Fact-sensitive. If the amount is clearly earnest money forfeited for default, non-taxability remains defensible; if the agreement creates a separate, standalone obligation to pay for cancellation, risk arises under Schedule II, entry 5(e).

3. Lease commenced, then terminated early. Once possession has been handed over and the lease is operational, early-termination charges or exit fees look much more like consideration for tolerating a situation — and are more likely to be taxable.

4. Token amount adjusted against rent. Once applied against rent or lease consideration, it simply becomes part of the taxable value of the renting supply.

5. Purely refundable security deposit. Generally not consideration at all, unless and until it is adjusted, appropriated, or forfeited in a way that ties it to a supply.

6. An express cancellation fee. If the documentation explicitly labels the amount a cancellation fee, termination fee, or charge for permitting withdrawal, it's much harder to argue non-taxability.

7. Liquidated damages or compensation clauses. Not automatically taxable merely because they sit in a contract clause — the real test is whether the payment is genuinely compensatory or a disguised charge for an agreed facility.

Scenario Matrix at a Glance

Situation	GST Position
Negotiations fail before lease execution	Generally outside GST
Token money forfeited before possession	Generally outside GST
Earnest money forfeited due to default	Generally outside GST
Lease operational and exit charges collected	Likely taxable
Cancellation fee specifically agreed	Likely taxable
Amount adjusted against rent	Taxable
Refundable security deposit merely held	Not taxable
Deposit appropriated towards supply	Taxable

Why This Is Different From a Cancellation Charge

A common error is treating forfeiture and cancellation charges as the same thing. They are legally distinct.

With a cancellation charge, the supplier provides a contractual facility allowing the customer to cancel, and the payment is consideration for that facility — GST generally applies.

With earnest money forfeiture, no facility is supplied, no benefit is granted, and no service is rendered. The amount merely compensates the affected party for failure of the transaction, so GST generally does not apply.

Substance Prevails Over Accounting Treatment

Crediting the amount to "Other Income," "Miscellaneous Income," or "Forfeiture Income" in the books does not, by itself, determine GST liability. Authorities examine commercial substance (what was the purpose of the payment, why was it retained, was any service actually supplied), contractual language (was cancellation permitted for a fee, was breach tolerated for consideration, was it described as earnest money), and conduct of the parties (was possession delivered, did tenancy commence, did any lease rights arise). Substance always overrides nomenclature.

Advance Ruling Trends

Various advance rulings examining forfeiture of earnest money and security deposits have generally adopted the principle that mere forfeiture does not create a taxable supply unless a distinct supply can be identified. The consistent theme is that GST applies to supplies, not to every flow of money between contracting parties — the existence of consideration alone is insufficient; there must first be an identifiable supply.

Documentation That Strengthens the Non-Taxable Position

From a litigation perspective, documentation is often more decisive than legal argument. Useful records include:

Document	Purpose
Negotiation correspondence	Establishes the failed transaction
Non-execution confirmation	Shows the lease never materialized
Possession records	Demonstrates no occupation rights were transferred
Settlement communication	Clarifies the basis of forfeiture
Accounting note	Records the amount as earnest money forfeiture
Internal approval note	Justifies retention of the amount
Legal memorandum	Supports the GST position taken

Drafting Mistakes That Can Create GST Exposure

Avoid language such as "fee for cancellation," "amount charged for withdrawal," "payment for allowing exit," "consideration for terminating negotiations," or "charge for tolerating breach." Such wording can hand the department exactly what it needs to invoke Schedule II, entry 5(e).

Prefer expressions such as "earnest money forfeiture," "forfeiture due to non-performance," "compensation for failure to complete transaction," or "retention of security against contractual default." The wording chosen should accurately reflect commercial substance — not just hedge for convenience.

Compliance and GST Return Reporting

Where forfeiture genuinely falls outside GST: no reporting is required as taxable outward supply in GSTR-1, and no liability arises in GSTR-3B. In the books of account, the amount may still be recognized as Forfeiture Income or Other Income. For audit documentation, maintain a legal note explaining the absence of supply, the absence of consideration for any service, and the applicability of CBIC Circular No. 178/10/2022-GST — this becomes valuable during departmental scrutiny and GSTR-9C reconciliation.

The key compliance discipline is internal consistency: if the books record forfeiture income but the GST returns show nothing, the file should contain a clear, contemporaneous note explaining why Section 7 doesn't apply.

Key Legal Principles at a Glance

Principle	Position
GST is a tax on supply	Correct
Every forfeiture is taxable	Incorrect
Earnest money forfeiture automatically attracts GST	Incorrect
Cancellation fee may attract GST	Correct
Failed lease negotiations create a renting service	Incorrect
No possession + no lease + no tenancy	Strong non-taxable case
Contract wording influences the GST outcome	Correct
Substance prevails over nomenclature	Correct

The Bottom Line

GST taxes supply, not every commercial loss. A token amount forfeited because a prospective tenant backed out before a lease was ever executed is compensation for a failed transaction, not consideration for a service — and compensation is not the same thing as consideration for supply. The moment a business starts charging a price for a facility — cancellation, early exit, postponement, or tolerating a breach — that price becomes consideration, and GST follows.

On facts where the lease was never executed, possession was never handed over, and the tenancy never began, the stronger and more defensible position is that the forfeited amount sits outside GST. That conclusion can flip entirely if the documentation instead points to an express cancellation charge or a standalone arrangement to tolerate breach for a price. The decisive test is not whether money changed hands — it is whether the money was received for a supply. In GST, as in most tax questions, substance and paperwork decide the outcome, not the label sitting in the ledger.

IMB Certification Explained – Part 1 The Approval That Separates Startup Recognition from Startup Tax Benefits

 By CA Surekha Ahuja

Every startup founder wants to know what tax benefits are available. Far fewer ask the more important question: Has the startup actually qualified for them?

India's startup ecosystem has witnessed extraordinary growth over the last decade. Founders today are familiar with fundraising rounds, venture capital term sheets, ESOP pools, startup valuations, investor due diligence and government-backed startup initiatives. Among these, DPIIT recognition has become one of the most widely discussed milestones in a startup's journey.

Yet, despite the growing sophistication of the ecosystem, a critical aspect of startup taxation continues to be misunderstood.

Many founders believe that once a startup obtains DPIIT recognition, the significant tax benefits associated with the Startup India framework automatically become available. In reality, some of the most valuable startup tax incentives depend upon a second and far less understood approval—Inter-Ministerial Board (IMB) Certification.

This distinction is not merely technical.

It helps explain why, as of April 2026, India has more than 1.97 lakh DPIIT-recognized startups, but only around 3,700 startups have obtained IMB Certification.

The gap is too large to be ignored.

More importantly, it reveals an important truth about India's startup tax framework: recognition and tax eligibility are not the same thing.

Understanding this distinction is the first step towards understanding how startup tax incentives actually work.

The Startup Conversation Most Founders Never Have

When entrepreneurs discuss building and scaling a startup, the conversation naturally revolves around growth.

Product development, customer acquisition, hiring, fundraising, market expansion, ESOPs and valuation dominate boardroom discussions.

What receives considerably less attention is a question that may ultimately determine access to several important tax benefits:

Has the startup merely been recognized, or has it also qualified for the incentives associated with that recognition?

Most founders assume these are two stages of the same process.

They are not.

And that misunderstanding often surfaces only when ESOP taxation, investor due diligence, funding rounds or tax planning discussions bring the issue into focus.

By that stage, founders are frequently discovering a distinction they believed had already been addressed.

Understanding the Two-Gate Framework

One of the biggest misconceptions in the startup ecosystem is the belief that startup recognition and startup tax eligibility are broadly synonymous.

They are not.

India's startup framework effectively operates through two separate gates, each designed to answer a different question.

Gate One: DPIIT Recognition

The first gate asks:

"Does this entity qualify as a startup under the Startup India framework?"

The review primarily focuses on incorporation records, constitutional documents and prescribed eligibility conditions.

The objective is straightforward.

The Government determines whether the entity satisfies the criteria necessary to be recognized as a startup.

Once approved, the entity becomes a DPIIT-recognized startup and gains access to various non-tax benefits available under the Startup India ecosystem.

However, DPIIT recognition should not be mistaken for tax eligibility.

It establishes startup status.

It does not automatically establish entitlement to startup-specific tax incentives.

Gate Two: IMB Certification

The second gate asks a much more demanding question:

"Is this the type of startup for which special tax incentives were intended?"

At this stage, the focus shifts from legal existence to business substance.

The Inter-Ministerial Board examines whether the startup demonstrates genuine innovation, scalability, employment generation potential and the capacity to create long-term economic value.

The issue is no longer whether the startup exists.

The issue is whether the startup has demonstrated the characteristics that justify the grant of special tax incentives designed to promote innovation-led entrepreneurship.

This distinction lies at the heart of India's startup tax framework.

DPIIT Recognition vs IMB Certification

Particulars	DPIIT Recognition	IMB Certification
Core Question	Is this a startup?	Is this an eligible startup for specified tax incentives?
Nature of Review	Documentation-based	Business evaluation-based
Primary Objective	Recognition	Tax benefit eligibility
Focus Area	Legal eligibility	Innovation, scalability and commercial substance
Section 80-IAC Deduction	Not available merely through recognition	Eligibility determined through certification
ESOP Tax Deferral	Not available merely through recognition	Eligibility determined through certification
Processing Approach	Administrative review	Substantive evaluation by the Board

The practical implication is significant.

Many founders discuss startup tax benefits after crossing the first gate, even though some of those benefits become relevant only after crossing the second.

Why Only 3,700 Startups Reach the Second Gate

Whenever a gap of this magnitude exists, the natural question is whether the certification process is excessively restrictive.

The answer is usually no.

The two approvals were never designed to serve the same purpose.

DPIIT recognition identifies startups.

IMB Certification identifies startups that satisfy a higher threshold for innovation-driven tax incentives.

The Board's mandate is not to reward incorporation. Its mandate is to identify businesses capable of generating innovation, intellectual property, employment opportunities and scalable economic value.

Viewed through that lens, the recurring reasons for rejection become remarkably consistent.

Applications often face difficulties where:

• The business model resembles conventional trading rather than innovation.
• Revenue growth depends primarily upon increasing manpower rather than scalable systems.
• Financial projections lack credible supporting assumptions.
• Intellectual property or technological differentiation is absent.
• The business appears to be a continuation or reconstruction of an existing enterprise.
• Significant assets have been transferred from an existing business.
• Commercial traction remains limited or inadequately demonstrated.

The Most Important Insight: The Board Evaluates Evidence, Not Narratives

Perhaps the single most important principle founders should understand before applying is this:

The Board evaluates evidence, not aspirations.

A pitch deck may describe innovation.

The Board looks for objective indicators supporting that claim. A founder may speak about scalability.

The Board seeks evidence demonstrating how scalability can realistically be achieved. A business plan may project future growth.

The Board examines whether there is sufficient substance to support those projections. In practical terms, stronger applications often contain:

• Proprietary technology or processes;
• Patent filings or intellectual property development;
• Demonstrable customer traction;
• Recurring revenue streams;
• Clear competitive differentiation;
• Scalable business architecture;
• Evidence-backed financial projections.

The lesson is simple.

The Board does not certify ambition. It evaluates evidence of innovation and scalability.

That distinction explains much of the gap between recognition and certification.

The Principle That Extends Beyond IMB Certification

The most valuable lesson from the IMB framework extends beyond IMB Certification itself.

One of the recurring themes in startup taxation is that benefits are frequently discussed before eligibility is examined.

Founders hear about startup tax holidays, ESOP tax relief and various startup incentives and understandably focus on the opportunities available.

However, sophisticated tax planning begins with a different question.

Not:

"What benefits exist?"

But:

"What conditions must be satisfied to access those benefits?"

The distinction may appear technical. In practice, it often determines whether tax planning succeeds or whether expectations eventually collide with reality. The law does not reward declared innovation.

It rewards demonstrated innovation. The law does not reward projected scalability.

It rewards businesses capable of evidencing scalability. IMB Certification is the mechanism through which that distinction is tested.

Why ESOPs Bring This Issue Into Sharp Focus

For many startups, the significance of IMB Certification becomes apparent only when employee stock options enter the conversation.

At that point, the issue moves from theory to practical consequence. 

Employees exercising stock options may become liable to tax on the perquisite value arising on exercise even though no liquidity event has yet occurred.

In simple terms, employees may possess wealth on paper while lacking the cash necessary to discharge the associated tax liability.

Recognizing this challenge, the law provides a tax deferral mechanism for employees of eligible startups, subject to prescribed conditions.

The distinction is crucial. The framework applies to eligible startups—not merely recognized startups.

Therefore, IMB Certification is not merely a compliance formality. It can directly influence the effectiveness of an ESOP programme as a tool for attracting, motivating and retaining talent.

A founder who assumes eligibility may unintentionally create expectations that the law does not support. A founder who understands eligibility early can structure the programme with greater certainty and credibility.

The Timing Mistake Most Startups Make

One of the most common strategic mistakes is treating IMB Certification as a future compliance task rather than a present planning exercise.

Many startups begin considering certification only when:

• An ESOP exercise window is approaching;
• A funding round is underway;
• Investor due diligence has commenced;
• A secondary transaction is being evaluated; or
• A liquidity event is on the horizon.

By that stage, valuable planning flexibility may already have been lost.

The more prudent approach is to work backwards from the transaction that matters.

If access to startup tax incentives could become relevant within the foreseeable future, the certification process should ideally begin well in advance. The cost of preparing early is usually administrative.

The cost of preparing late may affect employees, investors and transaction timelines.

Viewed through that lens, IMB Certification becomes less of a compliance decision and more of a governance decision.

The Real Message Behind the Numbers

The difference between 1.97 lakh DPIIT-recognized startups and approximately 3,700 IMB-certified startups is not merely an administrative statistic.

It reflects a deeper principle embedded within India's startup tax framework.

Recognition acknowledges the existence of a startup. Certification evaluates whether that startup has demonstrated the innovation, scalability and economic potential for which specific tax incentives were created.

India's startup ecosystem has become exceptionally successful at encouraging entrepreneurship.

The next challenge is ensuring that founders understand the distinction between startup recognition and startup tax eligibility.

Because future tax disputes, disappointed expectations and avoidable surprises are unlikely to arise because incentives do not exist.

They are more likely to arise because eligibility was presumed before it was demonstrated.

And that is precisely the gap that IMB Certification was designed to bridge.

Key Takeaways

Founders Should Remember Five Things

✓ DPIIT Recognition and IMB Certification serve entirely different purposes.

✓ DPIIT Recognition alone does not unlock Section 80-IAC benefits or ESOP tax deferral.

✓ The IMB evaluates evidence of innovation and scalability, not merely business plans and presentations.

✓ Certification should be planned well before funding rounds, ESOP exercises or liquidity events.

✓ The most expensive startup tax mistakes often arise when eligibility is assumed rather than established.

Coming Next in Part 2

Part 2: What Does a Successful IMB Application Look Like?

We will examine:

• How the Inter-Ministerial Board evaluates applications.
• The documents that matter most.
• What founders should include in their innovation and scalability narrative.
• Common mistakes that weaken otherwise deserving applications.
• Practical readiness checks before filing for certification.

Because once founders understand why IMB Certification matters, the next logical question becomes:

How do you actually obtain it?

 

Tax-Exempt Income in India for AY 2026-27: Section 10 Exemptions, Schedule EI Reporting Rules, Judicial Insights & Compliance

 By CA Surekha Ahuja

This guide applies exclusively to Assessment Year 2026-27 (Financial Year 2025-26).

The return being filed for AY 2026-27 continues to be governed by the Income-tax Act, 1961. Although the Income-tax Act, 2025 has come into force from 1 April 2026, it applies prospectively to income earned from FY 2026-27 onwards and therefore does not govern the current filing season.

Further, Schedule EI in the current ITR utility requires taxpayers to select the relevant exemption section while reporting exempt income. The earlier generic reporting option has been removed.

Every year taxpayers receive numerous amounts that are wholly or partly tax-free — PPF maturity proceeds, EPF withdrawals, gratuity, leave encashment, scholarships, agricultural income, family gifts, inheritances, life insurance maturity proceeds and certain foreign pensions.

The biggest mistake taxpayers make is assuming:

"Exempt income does not need to be disclosed."

For AY 2026-27, that assumption can create unnecessary compliance issues because exempt income reporting has become significantly more structured.

The correct question is no longer merely whether income is exempt.

The real questions are:

• Is it exempt?
• Under which provision is it exempt?
• Has it been disclosed correctly?

Quick Answer: Is It Exempt and Where Should It Be Reported

Receipt	Exempt?	Governing Provision	Report in ITR
Agricultural Income	Yes	Section 10(1)	Schedule EI
PPF Interest and Maturity	Yes	Section 10(11)	Schedule EI
EPF Withdrawal after 5 Years	Yes	Section 10(12)	Schedule EI
Sukanya Samriddhi	Yes	Section 10(11A)	Schedule EI
NPS Lump Sum Withdrawal	Up to statutory limit	Section 10(12A)	Schedule EI
NPS Partial Withdrawal	Yes	Section 10(12B)	Schedule EI
Life Insurance Maturity	Subject to conditions	Section 10(10D)	Schedule EI
Gratuity	Subject to limits	Section 10(10)	Schedule EI
Leave Encashment	Subject to limits	Section 10(10AA)	Schedule EI
Scholarship	Yes	Section 10(16)	Schedule EI
Gift from Relative	Excluded from taxation	Section 56(2)(x)	Consider disclosure
Inheritance	Excluded from taxation	Section 56(2)(x)	Consider disclosure
Marriage Gift	Excluded from taxation	Section 56(2)(x)	Consider disclosure
Dividend Income	Taxable	Taxable under Other Sources	Schedule OS
Mutual Fund Income Distribution	Taxable	Taxable under Other Sources	Schedule OS
UN Pension	Generally exempt	UN Act, 1947	Schedule EI

Exempt Income vs Excluded Income vs Deduction

One of the most common tax misconceptions is treating these concepts as identical.

Category	Example	Governing Provision
Exempt Income	Agricultural Income	Section 10
Excluded Income	Gift from Parent	Section 56(2)(x)
Deduction	PPF Contribution	Section 80C
Capital Gain Relief	House Reinvestment	Section 54

Understanding the distinction helps avoid incorrect disclosures and reporting errors.

What Has Changed for AY 2026-27

Schedule EI Reporting Has Become More Important

The current ITR utility requires taxpayers to identify the specific exemption provision while reporting exempt income.

The earlier generic reporting mechanism has effectively disappeared.

Consequently, taxpayers should maintain clear documentation supporting each exempt receipt.

Important Filing Due Dates

Category	Due Date
ITR-1 and ITR-2	31 July 2026
ITR-3 and ITR-4 (Non-Audit Cases)	31 August 2026
Audit Cases	31 October 2026

Retirement and Maturity Receipts

Public Provident Fund (PPF)

Interest and maturity proceeds remain fully exempt under Section 10(11).

Employees' Provident Fund (EPF)

Withdrawal after five years of continuous service is generally exempt under Section 10(12).

However, taxpayers should separately evaluate taxation of interest attributable to contributions exceeding prescribed thresholds.

Sukanya Samriddhi Account

Interest and maturity proceeds remain exempt under Section 10(11A).

National Pension System (NPS)

Section 10(12A) exempts the eligible lump sum portion withdrawn on closure or opting out of NPS.

Taxpayers should separately verify prevailing PFRDA withdrawal regulations and corresponding tax treatment applicable on the date of withdrawal.

Partial withdrawals satisfying statutory conditions are covered under Section 10(12B).

Life Insurance Maturity

Exemption under Section 10(10D) remains subject to applicable premium and policy conditions.

High-premium policies and certain ULIPs may not qualify for full exemption.

Gratuity

Government employees generally enjoy full exemption.

For non-government employees, exemption remains subject to statutory limits and conditions.

Leave Encashment

Government employees enjoy full exemption.

For non-government employees, exemption is presently available up to ₹25 lakh, subject to applicable conditions.

Section 10(15): Specified Interest Income

Certain notified interest incomes continue to enjoy exemption under Section 10(15).

These may include specified Government securities, tax-free bonds and other notified instruments, subject to the conditions contained in the relevant notification.

Taxpayers should verify the notification governing the instrument before claiming exemption.

Gifts, Inheritance and Family Transfers

A large number of taxpayers incorrectly classify gifts as Section 10 exemptions.

In reality, gifts from specified relatives, inheritances, receipts under a will and gifts received on the occasion of marriage are generally excluded from taxation under Section 56(2)(x).

Where the amount involved is substantial, appropriate disclosure and supporting documentation should be maintained to establish source and transparency.

UN Pension: A Unique Exemption

UN pension remains one of the most misunderstood exempt receipts.

The exemption arises not under Section 10 but under the United Nations (Privileges and Immunities) Act, 1947.

The legal position is supported by:

• CIT v. K. Ramaiah (126 ITR 638)
• CBDT Circular No. 293 dated 10 February 1981

Where disclosure is required, taxpayers should clearly mention the legal basis of exemption in the description field and retain supporting records.

Master Index of Frequently Used Section 10 Exemptions

Include the expanded Section 10 reference table from the revised draft, covering Sections 10(1) to 10(57), together with historical references to Sections 10(34), 10(35) and 10(38) as withdrawn provisions.

Compliance Checklist Before Filing

✓ Identify every exempt receipt.

✓ Verify the correct exemption provision.

✓ Reconcile exempt income with AIS and TIS.

✓ Retain supporting documents.

✓ Verify treatment of gifts and inheritances.

✓ Verify NPS withdrawal treatment.

✓ Verify insurance maturity eligibility.

✓ Check foreign income disclosures.

✓ Ensure Schedule EI disclosures are complete.

Common Errors That Trigger Notices

• Failure to disclose exempt income.
• Incorrect exemption section selection.
• Treating dividend income as exempt.
• Misclassification of gifts.
• Incorrect HRA calculations.
• Unsupported foreign pension claims.
• Incorrect NPS exemption claims.
• Failure to reconcile AIS/TIS data.

The Golden Rule for AY 2026-27

Most tax disputes involving exempt income do not arise because the exemption is unavailable.

They arise because:

• The income was not disclosed.
• The wrong provision was selected.
• Supporting records were inadequate.
• Information reporting systems reflected a different position.

Tax-Free Income Is Not Invisible Income

Whether the receipt is a provident fund maturity, gratuity, scholarship, agricultural income, inheritance, family gift, insurance maturity, foreign pension or retirement benefit, proper disclosure and documentation remain the most effective safeguards against future notices and litigation.

Professional Disclaimer

This article applies exclusively to Assessment Year 2026-27 (Financial Year 2025-26). The return continues to be governed by the Income-tax Act, 1961. The Income-tax Act, 2025 applies prospectively to income earned from FY 2026-27 onwards and does not govern the current filing season.

The article is intended solely for educational and informational purposes and reflects the law, judicial precedents, CBDT circulars and compliance requirements prevailing as on 17 June 2026. Readers should obtain professional advice before acting upon any specific transaction, exemption claim or tax position.