Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in the growth and development of the economy. Startups, as emerging businesses, often seek to register as MSMEs to benefit from various government schemes and regulatory support. The question arises whether startups can be classified as MSMEs under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) to avail the associated benefits. Understanding the criteria and the legal framework for such classification is essential for startups to make informed decisions about registration.
Legal Framework for MSME Classification
The classification of enterprises as micro, small, or medium is governed by the MSMED Act, 2006. The Central Government, through Notification S.O. 2119(E) dated 26 June 2020, introduced a composite criterion involving both investment and turnover to classify enterprises. This Notification, referred to as the New MSME Notification (NMN), also defines the procedure and form for filing the memorandum known as Udyam Registration. The NMN became effective from 1 July 2020, replacing previous notifications and consolidating the classification criteria.
The NMN was further amended by Notification No. S.O. 1364(E), dated 21 March 2025, which revised the investment and turnover limits applicable from 1 April 2025. These updates reflect the government’s effort to accommodate business growth and inflation in the MSME classification.
Criteria for Classifying MSMEs
According to the NMN, an enterprise is classified into micro, small, or medium based on two key financial parameters: investment in plant and machinery or equipment, and turnover. The criteria are as follows:
A micro enterprise is one where investment in plant and machinery or equipment does not exceed 1 crore rupees and turnover does not exceed 5 crore rupees.
A small enterprise is one where investment in plant and machinery or equipment does not exceed 10 crore rupees and turnover does not exceed 50 crore rupees.
A medium enterprise is one where investment in plant and machinery or equipment does not exceed 50 crore rupees and turnover does not exceed 250 crore rupees.
These criteria apply uniformly to both manufacturing and service enterprises.
Detailed Classification Table
The NMN specifies classification by combining the net investment in plant and machinery or equipment with the net turnover of the enterprise. The classification matrix is as follows:
When net turnover does not exceed 5 crore rupees and net investment does not exceed 1 crore rupees, the enterprise is classified as micro. If turnover exceeds 5 crore but does not exceed 50 crore rupees with investment up to 1 crore rupees, it is classified as small. If turnover exceeds 50 crore but does not exceed 250 crore rupees with investment up to 1 crore rupees, it is medium. If turnover exceeds 250 crore rupees with investment up to 1 crore rupees, the enterprise is not classified as MSME.
For investment exceeding 1 crore but not 10 crore rupees with turnover up to 5 crore rupees, the classification is small. With turnover between 5 and 50 crore rupees and the same investment, the classification remains small. For turnover between 50 and 250 crore rupees, the classification is medium. Beyond these turnover limits, it falls outside the MSME classification.
For investment exceeding 10 crore but not 50 crore rupees with turnover up to 5 crore rupees, the classification is medium. Similarly, for turnover between 5 and 250 crore rupees, it remains medium. Beyond the turnover limit of 250 crore rupees, the enterprise is classified as large.
Investment exceeding 50 crore rupees disqualifies the enterprise from MSME classification regardless of turnover.
The classification considers net investment as the written-down value or depreciated cost as per income tax returns, not the original cost or book value. Net turnover is calculated as total turnover less export turnover.
Application of Classification Criteria to Startups
Startups must evaluate their investment and turnover figures against these criteria to determine their eligibility as MSMEs. If the limits are exceeded in either investment or turnover, the enterprise moves to the next higher category or loses MSME status altogether. Importantly, enterprises cannot be classified in a lower category unless both investment and turnover fall below the specified ceiling limits for their current category.
In cases where a business operates multiple units with the same Permanent Account Number (PAN) but different Goods and Services Tax Identification Numbers (GSTIN), all units are collectively considered as one enterprise. The turnover and investment of all such units are aggregated for classification purposes.
Revised MSME Classification Limits from April 2025
The Union Budget of 2025 announced an enhancement of investment and turnover limits for MSME classification. The revised limits are effective from 1 April 2025. The investment limits for micro, small, and medium enterprises are increased to 2.5 crore, 25 crore, and 125 crore rupees, respectively. Turnover limits are revised to 10 crore, 100 crore, and 500 crore rupees, respectively.
This revision expands the range of enterprises eligible for MSME benefits, allowing growing startups to retain MSME classification under the new thresholds. The notification formalizing these changes is S.O. 1364(E), dated 21 March 2025.
Relationship Between MSME and Startup Definitions
Startups and MSMEs are distinct categories defined under different legal frameworks, but they can overlap in certain cases. A startup can also be classified as an MSME if it meets the eligibility criteria under both the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act) and the Department for Promotion of Industry and Internal Trade’s (DPIIT) Startup Notification.
The MSME classification depends on composite criteria of investment and turnover as prescribed in the New MSME Notification (NMN). In contrast, the startup status is defined primarily by DPIIT based on innovation, scalability, and turnover limits, as per the latest Startup Notification (LSN).
An enterprise that satisfies the criteria under both NMN and LSN can enjoy the dual status of being both an MSME and a startup. However, this dual classification is only applicable to certain types of business structures, such as partnership firms, limited liability partnerships (LLPs), and private limited companies. Proprietorships, Hindu Undivided Families (HUFs), public limited companies, associations of persons (AOPs), and cooperative societies can qualify as MSMEs but are not recognized as startups under the current DPIIT guidelines.
Conditions for Startups to be Considered MSMEs
Startups must satisfy the investment and turnover limits under the NMN to qualify as MSMEs. If a startup exceeds these limits, it will cease to be classified as an MSME even if it retains its startup status under DPIIT rules.
The status of a startup under DPIIT is limited by two conditions: the turnover should not exceed 100 crore rupees, and the enterprise should not be older than ten years from the date of incorporation. Once these limits are crossed, the startup status lapses.
An enterprise may cease to be a startup but still qualify as an MSME if it remains within the revised MSME investment limit of 125 crore rupees and turnover limit of 500 crore rupees (effective from 1 April 2025). Conversely, if the investment limit for MSMEs is exceeded but the startup turnover and age conditions are met, the enterprise will retain startup status but lose MSME classification.
Legal Distinctions Between MSME and Startup Status
The MSME status is governed by the MSMED Act, 2006, and the NMN. It requires meeting both investment and turnover limits for classification. Startup status is granted based on the DPIIT’s Startup Notification, which primarily focuses on turnover limits and innovation criteria without any investment ceiling.
MSMEs can be of any legal form, including proprietorships and cooperative societies, while startup recognition is limited to partnership firms, LLPs, and private limited companies. The startup definition requires that the enterprise be working towards innovation, development, or improvement of products or services, or have a scalable business model with high potential for employment generation or wealth creation.
Turnover for MSME classification excludes export turnover, whereas for startups, the entire turnover, including exports, is considered for the turnover ceiling of 100 crore rupees.
MSME status can be maintained indefinitely as long as the investment and turnover limits are not exceeded. Startup status is limited to ten years from incorporation or until turnover exceeds 100 crore rupees, whichever occurs earlier.
To obtain MSME recognition, enterprises must file Udyam Registration online. To be recognized as a startup, the enterprise must apply for DPIIT recognition under the Startup Notification guidelines.
Impact of Dual Status on Enterprises
An enterprise with dual status can avail of the benefits available under both the MSMED Act and the DPIIT startup schemes. This means access to credit facilitation, preference in government procurement, and protection against delayed payments under the MSMED Act, as well as tax holidays and exemption from certain audits under startup schemes.
However, the tax holiday under section 80-IAC of the Income-tax Act is only available to startups recognized by DPIIT, regardless of MSME registration status. MSME status alone does not confer income tax benefits unless the enterprise also qualifies as a startup.
Certain benefits under the MSMED Act such as purchase preference policies and delayed payment protection, are only available to MSMEs and not startups unless the startups meet MSME criteria and complete Udyam Registration.
Benefits Available to Micro Enterprise Startups Under the MSMED Act
Startups classified as micro enterprises and registered through Udyam Registration are entitled to several benefits under the Micro,,, and Medium Enterprises Development Act, 2006 (MSMED Act). One significant advantage is protection against delayed payments by buyers of goods or services. Under section 15 of the MSMED Act and section 43B(h) of the Income-tax Act, 1961, micro enterprises are eligible to claim interest on delayed payments from buyers as prescribed in section 16 of the MSMED Act.
Micro enterprise startups also benefit from time-bound resolution of disputes related to delayed payments through conciliation and arbitration mechanisms provided under sections 18 to 21 of the MSMED Act. These provisions ensure faster dispute resolution compared to conventional legal processes.
Further support is provided by the Central Government through various measures aimed at the promotion and development of micro enterprises as per section 9 of the MSMED Act. These initiatives include schemes for capacity building, skill development, and technological advancement.
The Reserve Bank of India (RBI) also has credit policies ensuring a timely and smooth flow of credit to micro enterprises, as mandated in section 10 of the MSMED Act. These policies encourage banks and financial institutions to facilitate easier access to finance for eligible MSMEs.
Preference policies notify micro enterprises as preferred suppliers in government procurement processes. Under section 11 of the MSMED Act, central and state government departments, aided institutions, and public sector enterprises (PSEs) are directed to give preference to micro enterprises in the purchase of goods and services, thereby supporting their market access.
Benefits Available to Small Enterprise Startups Under the MSMED Act
Small enterprise startups registered under Udyam Registration also enjoy protections and privileges similamicroenterprisesisess, with some distinctions. They are entitled to protection against delayed payments and interest on such payments under the MSMED Act and Income-tax Act provisions.
Like micro enterprises, small enterprise startups benefit from expedited resolution of payment disputes through conciliation and arbitration as prescribed in the MSMED Act. These measures help small enterprises maintain healthy cash flows and avoid lengthy legal battles.
Promotion and development initiatives by the Central Government, along with RBI’s credit facilitation policies, support the growth of small enterprise startups. These efforts encourage the adoption of modern technologies and the expansion of business capacities.
Preference policies extend to small enterprises as well, with government procurement guidelines favoring small enterprises to foster their participation in public contracts. This advantage increases the market opportunities available to registered small startups.
Benefits Available to Medium Enterprise Startups Under MSMED Act
Medium enterprise startups, whether involved in manufacturing or service sectors, are entitled to certain benefits under the MSMED Act, although these differ somewhat from micro and small enterprises. The primary benefits available to medium enterprises include promotion and development measures by the Central Government and credit facilitation policies implemented by the RBI.
However, medium enterprises are not eligible for protection against delayed payments and interest thereon. The MSMED Act’s provisions for time-bound dispute resolution related to payment delays do not apply to medium enterprises. Additionally, purchase preference policies in government procurement are not extended to medium enterprises.
Despite these limitations, medium enterprise startups benefit from enhanced access to finance and government support programs aimed at improving competitiveness and productivity. These advantages help medium startups scale their operations while maintaining regulatory compliance.
Necessity of Udyam Registration for Tax Benefits Under MSMED Act
Startups that qualify as MSMEs must complete Udyam Registration to officially gain MSME status and avail the benefits provided under the MSMED Act, 2006. Registration serves as legal recognition of the enterprise as a micro, small, or medium enterprise. Without Udyam Registration, an enterprise cannot claim protections such as delayed payment safeguards or preference in government procurement under the MSMED Act.
However, it is important to note that certain tax benefits available to startups under the Income-tax Act, 1961, specifically the tax holiday under section 80-IAC, do not require Udyam Registration. These income tax incentives depend solely on fulfilling the conditions prescribed for startups and recognition by the Department for Promotion of Industry and Internal Trade (DPIIT).
Therefore, while Udyam Registration is essential for accessing MSME-related benefits, it is not mandatory for availing startup-specific income tax concessions.
Income Tax Benefits Applicable to Startups
Startups enjoy several income tax benefits that are independent of their MSME classification. One of the most significant incentives is the tax holiday under section 80-IAC of the Income-tax Act, 1961. This benefit provides exemption from income tax for eligible startups for three consecutive years within the first ten years of incorporation, subject to fulfilling DPIIT recognition criteria and other prescribed conditions.
Startups organized as limited liability partnerships (LLPs) or private limited companies are eligible for this tax holiday. This provision incentivizes innovation and entrepreneurship by reducing the tax burden during the critical initial years of operation.
Additionally, eligible startup companies benefit from exemption from the angel tax under section 56(2)(viib) of the Income-tax Act. This exemption applies to funds raised by startups through the issuance of shares at a premium from specified investors, encouraging venture capital and private equity investments.
Startups with turnover or gross receipts not exceeding 10 crore rupees in a financial year are exempt from mandatory tax audit under section 44AB of the Income-tax Act from assessment year 2021-22 onwards. This exemption applies provided cash receipts and payments during the year do not exceed five percent of total receipts and payments, respectively, reducing compliance burden on smaller startups.
The Finance Act also provides for a concessional corporate tax rate of 25 percent for companies with turnover up to 400 crore rupees, which benefits many startups falling within this turnover threshold.
Distinction Between MSME and Income Tax Benefits
While MSMEs registered through Udyam Registration are entitled to various benefits under the MSMED Act, income tax benefits for startups are primarily governed by the Income-tax Act and DPIIT notifications. MSME status alone does not grant income tax concessions unless the enterprise also qualifies as a recognized startup.
Startups should understand that dual compliance—registering under MSME for sectoral benefits and securing DPIIT recognition for tax incentives—is necessary to maximize advantages. Failure to register as an MSME will not affect income tax benefits, but missing DPIIT recognition will disqualify startups from key tax holidays and exemptions.
Strategic Importance of Registration and Compliance
For startups, strategically obtaining both Udyam Registration and DPIIT recognition ensures access to a comprehensive suite of benefits. These include protection against delayed payments, credit facilitation, procurement preferences, tax holidays, and audit exemptions.
Timely registration, adherence to eligibility criteria, and proper documentation are critical to maintain eligibility and avoid disqualification from schemes. Enterprises should regularly monitor their turnover and investment levels to remain within prescribed limits or plan for transition out of MSME or startup status accordingly.
Conclusion
MSME registration offers a host of tangible and intangible advantages to startups, particularly those seeking to establish credibility, attract investment, and access a range of statutory incentives. By securing registration under the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act), a business obtains formal recognition as a micro, small, or medium enterprise, which can be leveraged for subsidies, concessional finance, priority lending, and participation in government procurement programs.
Eligibility for MSME status is determined by the composite criteria of investment in plant and machinery or equipment and annual turnover as prescribed in the New MSME Notification. The revised classification, effective July 2025, has broadened the thresholds, thereby allowing more enterprises, especially early-stage and growth-stage startups, to qualify. For example, the upper limits for investment and turnover have been increased for each category, ensuring that scaling businesses do not lose MSME benefits prematurely.
It is important to note that startups and MSMEs are distinct classifications, even though there is significant overlap. A startup is defined by the Department for Promotion of Industry and Internal Trade (DPIIT) based on parameters such as innovation, scalability, turnover (currently up to ₹100 crore), and the age of the business (up to 10 years from incorporation). By contrast, MSME classification is agnostic to innovation or business age, it is purely based on investment and turnover criteria.
An enterprise can therefore hold dual status both as an MSME and a recognized startup if it meets the definitions and completes the registration requirements for each. This dual recognition unlocks the ability to enjoy benefits under both regimes. For example:
- MSME benefits include lower interest rates on loans, delayed payment protection, participation in government tenders with relaxed eligibility norms, capital and technology upgradation subsidies, and protection under the MSMED Act in case of payment defaults.
- Startup benefits include income tax exemptions for three consecutive years under Section 80-IAC, exemption from angel tax, easier public procurement norms, fast-tracking of patent applications, and access to the Fund of Funds for Startups (FFS).
For a manufacturing startup, this dual recognition could mean access to priority sector lending as an MSME, along with intellectual property protection support through the startup ecosystem. For a tech startup offering hardware solutions, MSME status could aid in acquiring affordable equipment financing, while startup recognition could help in raising early-stage equity without heavy tax burdens.
Given the complementary nature of these frameworks, entrepreneurs should evaluate their eligibility for both and pursue registration proactively. This not only maximizes financial and operational advantages but also enhances credibility with investors, banks, and customers. Moreover, retaining MSME benefits even during the scaling phase, thanks to the revised July 2025 limits, ensures sustained competitive advantage without sacrificing growth momentum.