MSME Registration for Startups – Criteria and Dual Benefits

Question arises whether a start-up is also eligible to be classified as MSME to obtain benefits under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006).

The Central Government has, vide Notification S.O. 2119(E), dated 26.06.2020 [New MSME Notification (NMN) (See Appendix 5)], notified a composite criteria of investment and turnover for classifying the enterprises as micro, small and medium enterprises. The Notification also specifies the form and procedure for filing the memorandum (“Udyam Registration”). The Notification is applicable with effect from 01.07.2020 and is in exercise of the powers conferred by sub-section (1) read with sub-section (9) of section 7 and sub-section (2) read with sub-section (3) of section 8, of the Micro, Small and Medium Enterprises Development Act, 2006 and in supersession of the notifications S.O. 1702(E), dated the 1st June, 2020, S.O. 2052(E), dated the 30th June, 2017, S.O. 3322(E), dated the 1st November, 2013 and S.O. 1722(E), dated the 5th October, 2006.

The NMN has been amended vide Notification No. S.O. 1364(E), dated 21.03.2025, to give effect to the revision of investment and turnover limits for classification of MSMEs. The revised limits are applicable with effect from 01.04.2025.

Para 1 of the NMN specifies a composite criteria of investment and turnover for classifying the enterprises as micro, small and medium enterprises. Accordingly, an enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely—

(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

The revised definition of MSME applicable with effect from 01.07.2020 is based on composite criteria of turnover limits and limits of investment in plant and machinery or equipment. The same limits apply to both manufacturing and service enterprises.

The following Table shows the classification of MSMEs into micro, small and medium categories based on various combinations of situations as regards net investment in plant and machinery or investment and net turnover –

Notes –

1. In the above table cell No. 1 represents a situation where net investment in plant and machinery of an enterprise does not exceed Rs. 1 crore and net turnover does not exceed Rs. 5 crores and so on.
2. Investment in plant and machinery or equipment means “the net investment in plant and machinery or equipment” i.e. WDV or depreciated cost as per ITRs filed and not original cost or book value.
3. Net Turnover means Total turnover less export turnover.
4. If an enterprise crosses the ceiling limits specified for its present category in either of the two criteria of investment or turnover, it will cease to exist in that category and shall be placed in the next higher category.
5. No enterprise shall be placed in the lower category unless it goes below the ceiling limits specified for its present category in both the criteria of investment as well as turnover.
6. All units with Goods and Services Tax Identification Number (GSTIN) listed against the same Permanent Account Number (PAN) shall be collectively treated as one enterprise and the turnover and investment figures for all of such entities shall be seen together and only the aggregate values will be considered for deciding the category as micro, small or medium enterprise.

Revised Classification of MSMEs applicable with effect from 01.04.2025

In the Union Budget Speech, 2025, the Finance Minister announced that the investment and turnover limits for classification of all MSMEs will be enhanced to 2.5 and 2 times respectively. [See Para 28 of the Union Budget Speech, 2025]

The revision of limits is as follows –

The above revised investment and turnover limits have been made applicable with effect from 01.04.2025 [Notification No. S.O. 1364(E), dated 21.03.2025]

Yes. They will be regarded as MSMEs provided they satisfy the investment limits and turnover limits in the definitions of MSME. An enterprise can be an MSME as well as a startup by satisfying the definitions of both MSME in NMN as above and of startup as per LSN. MSME and Startup legal status are not mutually exclusive. Only partnership firms, LLPs and Companies can have both the status of “MSME” and of startup under the LSN. Proprietorships, HUFs, Public Limited Companies, AOPs, Co-operative Societies can be MSME, but not startup as defined in LSN.

Startups will cease to be regarded as “startups” under LSN the moment they cross the 100 cr. turnover ceiling limit or 10 years have lapsed since incorporation. Even after an entity ceases to be a startup as above, it will continue to be MSME as per NMN so long as it does not exceed the turnover limit of ₹ 250 cr (₹ 250 crores w.e.f. 01.04.2025). and investment limit of ₹ 50 cr (₹ 125 crores w.e.f. 01.04.2025). Likewise an entity may lose its MSME status if investment limit of ₹ 50 cr (₹ 125 crores w.e.f. 01.04.2025). is exceeded but retain its startup status if turnover is ₹ 100 cr. or less and 10 years have not lapsed since incorporation.

MSME is defined by the MSMED Act. Startup is defined by the DPIIT’s Startup Notification No. GSR 127(E), dated 19.02.2019 [i.e. Latest Startup Notification (LSN)]. Turnover limit to qualify as ‘start-up’ under LSN is ₹ 100 crores to qualify for DPIIT recognition. Turnover limit to qualify as MSME is ₹ 250 crores (₹ 500 crores w.e.f. 01.04.2025). An enterprise can be an MSME as well as a startup by satisfying the definitions of NMN as well as LSN respectively.

The distinction between MSME and startup can be summed up thus as under –

It can be seen from above that an enterprise may cease to be start-up but continue to be regarded MSME and vice versa.

Yes. An enterprise can claim benefits under both MSMED Act as well as LSN if it is a partnership firm or LLP or private limited company recognised by DPIIT and it satisfies all the conditions under LSN and NMN as well as files Udyam Registration online.

A micro enterprise startup may avail the following benefits under the MSMED Act –

• Protection against delayed payments by buyers of goods/services [section 15 of the MSMED Act, 2006 and section 43B(h) of the Income-tax Act, 1961] and interest on delayed payments (section 16 of the MSMED Act, 2006) to a micro enterprise which has filed Udyam Registration.
• Time-bound resolution of payment-related disputes with buyers through conciliation and arbitration [Sections 18 to 21 of MSMED Act, 2006]
• Central Government’s measures for promotion and development (section 9 of the MSMED Act, 2006).
• RBI’s credit policies for ensuring timely and smooth flow of credit (section 10 of the MSMED Act, 2006).
• Preference policies (preference to micro enterprises in respect of goods and services procured by Government Departments/aided institutions/PSEs) notified by Central/State Government (section 11 of the MSMED Act, 2006).

A small enterprise startup may avail the following benefits under the MSMED Act –

• Protection against delayed payments by buyers of goods/services [section 15 of the MSMED Act, 2006 and section 43B(h) of the Income-tax Act, 1961] and interest on delayed payments (section 16 of the MSMED Act, 2006) to a small enterprise which has filed Udyam Registration.
• Time-bound resolution of payment-related disputes with buyers through conciliation and arbitration [Sections 18 to 21 of MSMED Act, 2006].
• Central Government’s measures for promotion and development (section 9 of the MSMED Act, 2006).
• RBI’s credit policies for ensuring timely and smooth flow of credit (section 10 of the MSMED Act, 2006).
• Preference policies (preference to small enterprises in respect of goods and services procured by Government Departments/aided institutions/PSEs) notified by Central/State Government (section 11 of the MSMED Act, 2006).

The following benefits/facilities are available to all medium enterprises under the MSMED Act whether manufacturing/production enterprises or service enterprises –

• Central Government’s measures for promotion and development (section 9 of the MSMED Act, 2006).
• RBI’s credit policies for ensuring timely and smooth flow of credit (section 10 of the MSMED Act, 2006).

A medium enterprise is not entitled to the benefits of –

• Protection against delayed payments by buyers of goods/services and interest on delayed payments.
• Time-bound resolution of payment related disputes with buyers through conciliation and arbitration (sections 18 to 21 of MSMED Act, 2006); and
• Purchase Preference policies (section 11 of the MSMED Act, 2006).

No. Benefits to a start-up under section 80-IAC of the Income-tax Act, 1961 are dependent on satisfying conditions under section 80-IAC and NMN. Not filing Udyam Registration will not result in denial of benefits under Income-tax Act, 1961 though it will result in loss of benefits under MSMED Act.

For start-ups, following Income-tax benefits applicable whether they satisfy MSME definition or not –

• Start-up LLPs and PLCs are entitled to tax holiday under section 80-IAC.
• Start-up PLCs. entitled to angel tax exemption.
• A start-up entity whose turnover or gross receipts in any financial year does not exceed Rs. 10 crores is exempt from compulsory tax audit under section 44AB with effect from assessment year 2021-22 if—

1. 1. aggregate of all amounts received including amount received for sales, turnover or gross receipts during the previous year, in cash, does not exceed 5% of the said amount; and
   2. aggregate of all payments made including amount incurred for expenditure, in cash, during the previous year does not exceed five per cent of the said payment.

• A company whose turnover does not exceed Rs. 400 cr. in a financial year is entitled to concessional rate of tax of 25% applicable to small and medium companies as per the Finance Act.