Govt’s thrust on deep-tech innovation needs realignment of investment rules

The recently announced Union Budget placed strong emphasis on AI, data, semiconductors, and deep-tech companies, underscoring India’s push for technological sovereignty. In line with this, the Department for Promotion of Industry and Internal Trade has issued a fresh notification, replacing the 2019 framework that clearly defines what qualifies as a ‘Deep Tech Startup’. 

High R&D intensity a core eligibility criterion

The revised definition classifies deep-tech startups as ventures developing solutions rooted in new or emerging scientific or engineering advancements—whether already created or still under development. These companies typically allocate a high proportion of their revenue or funding to research and development (R&D), own or are building significant novel intellectual property (IP) with plans for commercialisation, and operate in sectors marked by long gestation periods, high capital and infrastructure needs, and substantial technical or scientific uncertainty. 

More importantly, the framework also expands the eligibility of recognition on deep-tech startups to 20 years and increasing the turnover from earlier ₹100 crore to ₹300crore. These changes are being seen as a much-needed breather for the deep tech space. Dr. Sunil Shekhawat, Co-founder and CEO of SanchiConnect, which is a deep-tech focused startup connect platform, says earlier many growth-stage companies lost access to policy benefits just as they began scaling while deep-tech ventures struggled with timelines and limits that did not reflect their longer gestation periods and higher capital needs. 

“With the new notification, expanding the turnover ceiling to ₹200 crore allows more scaling startups to remain within the policy framework, and the extended 20-year eligibility, along with the enhanced ₹300 crore cap for deep-tech startups, better aligns regulation with the realities of innovation-led enterprises. This shift will enable founders to focus more on building and innovating rather than navigating regulatory constraints, improve access to incentives and capital, and further strengthen India’s position as a global hub for technology-driven entrepreneurship,” he said.   

Expanded entity eligibility broadens deep-tech ecosystem

While the new notification calls for additional documentation to enable distinct recognition of deep-tech startups, it has also expanded the eligible entity types. Beyond private limited companies, partnership firms and LLPs, the framework now includes Multi-State Cooperative Societies and State Cooperative Societies. Investors, particularly those backing aerospace and defence ventures, view the changes as supportive of long-gestation innovation cycles. Cdr. Navneet Kaushik, Founder and Managing Partner of Jamwant Ventures, says the changes are a gamechanger for patient investors. 

“Deep-tech startups often take years to hit that sweet profitability ‘J-curve’. Now, with 20 years of recognition and a ₹300-crore turnover cap, they can time their Section 80-IAC tax holidays perfectly recovering R&D costs faster and reinvesting in more innovation. Earlier, just when they started getting profitable, the window to take reasonable exemptions of tax benefits would close. Some of our portfolio companies today are right on the cusp of that J-curve, so they can significantly benefit from these changes while others can now start planning without pressure,” Kaushik added.  

While home-grown investors see these changes as timely and necessary, experts caution that gaps remain. Deep-tech innovations, which are capital-intensive and stand to benefit significantly from foreign funding, continue to face regulatory and funding hurdles. For instance, Chandrashekar K., Leader - Financial Services & Regulatory Practice, Nishith Desai Associates, says the policy realignment reflects a structural reality of deep-tech ecosystem. “This recognition not only mitigate the risk of premature derecognition of such ventures but also deepens confidence among founders and long-horizon investors and supports more sustained VC participation,” he says while adding deep-tech sectors, where funding cheque sizes are significantly larger and foreign technical collaboration is often critical, liberalising these areas under the NDI Rules and the FDI policy is essential. 

For instance, while the DPIIT startup framework recognises LLPs as eligible entities, the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 recognise only startup companies—and not startup LLPs—for foreign investment purposes. This restricts LLPs from accessing several foreign investment benefits otherwise available to recognised startups. Similarly, under the current regime, convertible notes can be converted only into equity shares and not into other equity-linked instruments such as fully and compulsorily convertible preference shares (CCPS) or fully and compulsorily convertible debentures (CCDs), even though these are treated as eligible equity instruments for FDI. Experts note that for startups to fully benefit from the recent changes, these regulatory inconsistencies will need to be addressed.    

“Its (notification) full impact and success will, however, depend on clear and comprehensive technical parameters and consistent operational guidance from DPIIT, including corresponding reforms in areas such as foreign investment rules, and streamlined processes for applicants seeking deep-tech startup status,” adds Chandrashekar.