Suggested
MSME Blog
14 Jul 2025
122 Viewed
Contents
MSMEs form the industrial backbone of India, contributing significantly to economic growth, employment, and exports. Recognising their importance, the government offers numerous tax incentives to nurture their development. These benefits include reduced tax rates, simplified compliance procedures, presumptive taxation schemes, and special deductions for innovation and employee welfare.
Recent regulatory updates have further expanded available incentives, particularly for manufacturing units and eco-friendly technologies. Understanding these benefits is crucial for MSMEs to optimise their tax positions and improve cash flow, especially during challenging economic periods.
Micro, Small, and Medium Enterprises (MSMEs) are the backbone of India's economic structure, constituting over 63 million businesses that employ more than 110 million people. Defined under the MSME Development Act 2006 and revised in 2020, these enterprises are categorised based on investment in plant and machinery and annual turnover rather than employment. The sector represents a diverse range of businesses spanning manufacturing, services, retail, and agricultural activities, contributing approximately 30% to India's GDP and 45% to exports.
MSMEs in India enjoy substantial fiscal incentives designed to foster growth and sustainability. Under Section 80JAA, eligible entities can claim 30% of additional wages paid to new employees for three assessment years. The presumptive taxation scheme under Section 44AD allows businesses with turnover up to ₹2 crore to declare 8% of their turnover as taxable income (6% for digital transactions), significantly reducing the compliance burden. MSMEs can also benefit from accelerated depreciation on specified assets and investment allowances for new plant and machinery.
Additionally, startups registered with DPIIT can claim a 100% tax holiday for three consecutive years within their first ten years of operation. As industry experts at Bajaj Allianz General Insurance Company highlight, comprehensive business insurance policies tailored for MSMEs not only provide risk protection but also offer tax benefits. Lower corporate tax rates of 25% apply to companies with turnover up to ₹400 crore, compared to the standard 30% rate, providing considerable savings opportunities for qualifying businesses.
Also Read: Do MSME Insurance Policies Cover Worldwide Accidental Bodily Injury?
The GST framework offers several concessions to MSMEs, including the composition scheme which allows businesses with turnover up to ₹1.5 crore to pay a flat reduced rate of 1% (manufacturers), 5% (restaurants), or 6% (other services) on turnover instead of regular GST. This simplifies compliance by requiring only quarterly returns instead of monthly filings. MSMEs with turnover below ₹40 lakh (₹20 lakh for specified states) enjoy exemption from GST registration.
The e-invoicing exemption for businesses with turnover below ₹10 crore reduces compliance costs, while the quarterly return monthly payment (QRMP) scheme eases working capital pressure. Input Tax Credit (ITC) provisions allow MSMEs to claim credit for taxes paid on inputs, reducing effective tax outflow. For imports, specified capital goods attract concessional customs duty rates, making technology upgradation more affordable.
Recent initiatives like automated refund mechanisms have improved cash flow efficiency, while the e-way bill exemption for intra-state movement of goods valued below ₹50,000 reduces logistics complications and administrative overhead for smaller enterprises.
Recent amendments to Section 10(10D) have redefined tax exemptions on life insurance policies. For policies issued after April 1, 2023, tax exemption on maturity proceeds is limited to policies with annual premiums not exceeding ₹5 lakh. This significant change affects how MSMEs structure key-person insurance and employee benefit packages. Death benefits remain tax-exempt regardless of premium amount, preserving the primary protection aspect of life insurance.
For MSMEs, group insurance schemes still qualify for business expense deductions under Section 37(1) when structured properly as employee welfare measures. Professional advisors at Bajaj Allianz General Insurance Company recommend carefully evaluating insurance portfolios to maximise both protection and tax advantages. The tax authority has also clarified that policies taken before April 1, 2023, remain grandfathered under previous rules, maintaining their tax-exempt status irrespective of premium amount, providing valuable protection for existing insurance-based financial planning.
Unit-linked insurance plans (ULIPs) now face similar restrictions, with tax exemptions only applicable to policies with annual premiums below ₹2.5 lakh, requiring strategic reconsideration of investment-linked insurance products in MSME financial portfolios.
Many MSMEs fail to maintain proper documentation of expenses and transactions, leading to rejected deductions during scrutiny. Mixing personal and business expenses, especially common in proprietorships and partnerships, creates compliance issues and lost tax benefits. Late registration for schemes like GST composition or presumptive taxation can result in missed benefits for the entire assessment period.
Underutilisation of available depreciation provisions and inadequate awareness of sector-specific incentives significantly reduce potential tax savings. Failure to file returns within deadlines not only incurs penalties but also prevents access to certain tax benefits altogether. Neglecting to update business registrations when crossing turnover thresholds can lead to non-compliance penalties that far outweigh temporary tax advantages.
Also Read: Duties And Obligations Of A MSME Insurance
The comprehensive tax benefits available to MSMEs in India offer significant opportunities for business growth and financial optimisation. From direct tax reductions through presumptive taxation and corporate tax rate concessions to indirect tax simplifications via the GST composition scheme, these incentives create a supportive fiscal environment.
To maximise these advantages, MSMEs should maintain meticulous compliance records, seek professional tax guidance, and stay updated on regulatory changes. When strategically utilised, these tax benefits can substantially improve cash flow, enhance competitiveness, and accelerate business expansion in India's dynamic economic landscape.
While not mandatory for all benefits, MSME registration through the Udyam portal is essential for accessing most government schemes and tax incentives. Without registration, businesses cannot claim sector-specific deductions, preferential rates on bank loans, or participate in government procurement programmes with reserved quotas for MSMEs.
MSMEs with an annual turnover below ₹40 lakh (₹20 lakh in some states) are exempt from GST registration. Those with turnover up to ₹1.5 crore can opt for the composition scheme, paying reduced flat rates (1-6% based on business type) instead of standard GST rates, though they cannot collect GST or claim input tax credits.
Yes, insurance premiums for business assets, liability coverage, and employee benefits are generally tax-deductible as business expenses under Section 37(1). Key-person insurance premiums are deductible when the business is both the policyholder and the beneficiary. Health insurance premiums for employees qualify for deductions under Section 80D within specified limits.
Absolutely. MSMEs can claim depreciation on tangible and intangible business assets as per the rates specified in the Income Tax Act. Additional depreciation at 20% is available on new plant and machinery. From FY 2023-24, enhanced depreciation rates apply to green energy equipment and pollution control devices, offering both financial and sustainability advantages.
Manufacturing MSMEs enjoy higher investment allowances, additional depreciation on plant and machinery, and lower GST composition rates (1% vs. 6% for services). Service MSMEs benefit from lower presumptive taxation thresholds (6% vs 8%) for digital transactions and special deductions for export services. Manufacturing units in special economic zones receive additional tax holidays not available to service providers.
*Standard T&C apply
**Insurance is the subject matter of solicitation. For more details on benefits, exclusions, limitations, terms, and conditions, please read the sales brochure/policy wording carefully before concluding a sale.
***Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making any related decisions.
17333 Viewed
5 mins read
07 Jan 2025
638 Viewed
5 mins read
06 Jan 2025
398 Viewed
5 mins read
31 Mar 2025
198 Viewed
5 mins read
07 Jan 2025
What makes our insurance unique
With Motor On-The-Spot, Health Direct Click, etc we provide fast claim process , Our sales toll free number:1800-209-0144