Startup Advisory
Setting Up Accounting for an Indian Startup: Systems, Chart of Accounts and the Right First Steps
Lekha Editorial Team
CA-reviewed · Published
Most founders set up accounting when their CA tells them to, using whatever software their CA recommends, with a chart of accounts that no one in the business actually understands. Then year 18, they open a data room and spend 6 weeks reconstructing books. The cost of doing accounting right from month 1 is ₹3,000–₹5,000 per month. The cost of reconstructing 2 years of wrong books is ₹2–₹5 lakh.
Choosing the Right Accounting Software
The three dominant options in India: Tally ERP 9 / TallyPrime, Zoho Books, and QuickBooks Online.
Tally: the dominant choice among CAs and compliance-focused businesses. Strong for Indian GST compliance, TDS calculations, and statutory reporting. Offline-first (data on local server). Steep learning curve for non-accountants. Best choice if your CA insists (because they know Tally) and you have dedicated finance staff.
Zoho Books: cloud-first, Indian GST and TDS integrated, automatic bank reconciliation via API, reasonable reporting. The best choice for early-stage startups where the founders or a part-time bookkeeper maintain the books, and investors expect digital, accessible reports. GST filing from within Zoho Books is built-in.
QuickBooks Online: the global standard, better for companies with international operations or non-Indian investors who are familiar with it. Less Indian-specific GST/TDS functionality than Zoho or Tally. Best for companies with foreign subsidiaries or international operations.
For most Indian seed-stage startups: Zoho Books. Cloud access, decent investor reporting templates, handles Indian GST and TDS requirements, ₹2,500–₹5,000 per month depending on plan.
Chart of Accounts: Design for Investor Reporting
The chart of accounts is the taxonomy of every financial transaction in your company. Most default setups are wrong for startups — they're designed for traders or manufacturers, not software or services companies.
For a SaaS or tech startup, your revenue accounts should separate subscription revenue, one-time setup fees, professional services revenue, and any other recurring revenue stream. This matters because investors will ask for MRR (monthly recurring revenue) and ARR — and you need to be able to produce these from your accounts without manual calculations every time.
Your cost accounts should separate cost of revenue (hosting, infrastructure, third-party APIs, support staff directly serving customers) from sales and marketing (ads, sales team salaries, events), from R&D (engineering team salaries, development tools), from G&A (admin, legal, accounting, office). These map to the gross margin and EBITDA calculations that investors use.
Two things that investors check in your books that most startups get wrong: (1) whether founder salaries are booked correctly (founders taking money from the company account that isn't on payroll — this creates both a TDS compliance problem and a related-party transaction issue); (2) whether ESOP expenses are being accrued correctly (Indian GAAP requires expensing options over the vesting period).
Payroll Setup and the TDS Calendar
Employee payroll creates the most recurring compliance obligation for early-stage startups. The key requirements:
Payroll register: maintain monthly payroll details for every employee — gross salary, all deductions (PF, professional tax, TDS), and net pay. This must tie to your bank payments and your TDS return.
PF (Provident Fund): mandatory once you have 20+ employees (some states extend to 10+ in certain industries). Employers contribute 12% of basic salary, employees contribute 12%. Monthly challan payment by the 15th of the following month.
Professional Tax: state-level tax on employment income. Rates vary by state — in Maharashtra it's ₹200/month for salaries above ₹10,000. Employers deduct and remit monthly or annually depending on the state.
TDS on Salaries: the employer must deduct TDS monthly based on the projected annual salary and the employee's tax liability. The TDS deducted must be remitted to the government by the 7th of the following month and reported in quarterly Form 24Q.
Key takeaway
The right accounting setup costs ₹30,000–₹60,000 for the first year and saves you ₹1–₹5 lakh in reconstruction costs before your first fundraise. Prioritise: choose cloud software (Zoho Books), design a chart of accounts that matches how investors ask for data, and set up payroll correctly from the first employee.
Frequently asked questions
At what point does a startup need to hire a full-time accountant?
A rule of thumb: hire a full-time accountant when your transaction volume (invoices raised, bills paid, payroll processed) exceeds what a part-time bookkeeper can handle in 2 days per week, or when your finance function is meaningfully impacting fundraising or investor reporting preparation. For most startups, this is around 30–50 employees or ₹10–30 crore ARR. Below that, a combination of good accounting software and a part-time CA-managed bookkeeping service (₹3,000–₹8,000 per month) is sufficient.
What is the difference between accrual and cash basis accounting for Indian startups?
Cash basis accounting records income when cash is received and expenses when cash is paid. Accrual accounting records income when it is earned (even if not yet received) and expenses when they are incurred (even if not yet paid). The Companies Act requires accrual-based accounting for all Indian companies — this is not optional. Accrual accounting is also what investors expect; a startup showing cash-basis numbers in its investor reports will be corrected in diligence.
Do Indian startups need to comply with Ind AS from inception?
Not immediately. The Ind AS (Indian Accounting Standards, converged with IFRS) mandatory applicability thresholds are: net worth above ₹250 crore, listed companies, or companies that are subsidiaries/associates of Ind AS companies. Most startups are below these thresholds and follow the simpler Companies (Accounting Standards) Rules (the AS framework). However, if you're planning an international exit or IPO, starting Ind AS compliance early (or at least keeping books in a way that can be restated to Ind AS) reduces future conversion cost.
How should startup founders handle personal and company expenses?
Strictly separate. The company bank account is for company expenses only — operational costs, payroll, vendor payments, tax payments. Founders who use the company account for personal expenses (car payments, household bills, personal travel) create: a related-party transaction that requires board approval, a TDS obligation on what may be treated as a benefit in kind, and a diligence red flag when investors see mixed-use bank statements. If you need money from the company as a founder, take a salary (on payroll, with proper TDS deduction) or repay a formal founder loan with proper documentation.
What accounting records must be maintained for 8 years in India?
Under the Companies Act, 2013, companies must maintain books of account for a minimum of 8 years from the end of the relevant financial year. This includes: books of account (ledgers, journals), vouchers, minutes of board and shareholder meetings, register of members, register of directors, annual returns, and financial statements. For tax purposes, the Income Tax Act requires records to be maintained for 6 years from the end of the relevant assessment year. In practice, maintain everything digitally in a cloud backup system and don't delete anything for at least 8 years.
Related articles
Annual Compliance Requirements for Private Limited Companies in India: The Complete Checklist
Startup Advisory
Fundraising Documents Checklist: What Indian Investors Ask for Before Writing a Cheque
Startup Advisory
When Does Your Startup Need a CFO? Five Signals That Tell You It's Time
Virtual CFO Services