Karnataka IT Policy: Big Bet on Tier-II India & Promises Massive Cost Relief for Startups

For years, the Indian startup map has been overwhelmingly Bengaluru-centric — a city that built unicorns, attracted global venture capital, and became the natural first home for founders chasing talent and tech infrastructure. But as the ecosystem matures, early-stage startups are facing a hard reality: Bengaluru’s soaring rentals, rising operational costs, and intense competition have made it an expensive playground for young companies still figuring out product-market fit.

Now, Karnataka wants to rewrite that script.

With the freshly approved Karnataka IT Policy 2025–2030, the state is making one of its clearest pushes yet to decentralize innovation and redirect the startup wave into fast-emerging Tier-II hubs. And for founders feeling the burn of overheads, the policy reads like a long-awaited relief plan.

A ₹967-Crore Bet on ‘Beyond Bengaluru’

The new IT policy comes with a ₹967 crore outlay, of which ₹754 crore is earmarked purely for direct incentives — an unusually high allocation that signals Karnataka’s intent.

This time, the spotlight is deliberately shifting away from the state capital to a corridor of Tier-II cities:
Mysuru, Mangaluru, Hubballi-Dharwad, Belagavi, Kalaburagi, Shivamogga, Davanagere, and Tumakuru.

These cities have long been celebrated for their talent pools and quality of life, but often overlooked due to the gravitational pull of Bengaluru. Yet, their economics tell a compelling story:

• Office rents are 30–50% cheaper

• Spaces are available for ₹20–₹30 per sq. ft

• Living costs are 25–40% lower

The new IT policy not only leverages these inherent advantages but amplifies them with a wide basket of incentives aimed at lowering burn rates for early-stage companies.

A 360° Incentive Framework Designed for Startup Survival

The policy lays out 16 incentives across five categories — R&D, talent, infrastructure, operations, and market expansion. Importantly, nine incentives are entirely new, introduced specifically to encourage startups to relocate or expand to these Tier-II regions.

Some of the most impactful benefits include:

1. R&D Boost

• Up to 40% reimbursement of eligible R&D spend

• Caps ranging between ₹5 crore to ₹50 crore, depending on project scale

2. Intellectual Property Support

• Up to ₹10 lakh reimbursement for patent filings

3. Big Savings on Workspace

• 50% office rent reimbursement, potentially saving companies up to ₹2 crore

4. Property Tax Relief

• 30% rebate on property tax for three years

5. Zero Electricity Duty

• A complete waiver for five years, translating into ₹5–₹20 lakh in annual savings

6. Talent Incentives

• ₹50,000 per employee for relocating talent

• EPF reimbursement of ₹3,000 per employee per month for up to two years

7. Operational Support

• 25% reimbursement on internet and telecom expenses for five years

Together, these benefits reshape the cost structure for startups that often struggle with their first two years of runway.

How Much Can a Founder Really Save?

The policy’s real impact becomes clearer when applied to a typical founder scenario.

For instance, an entrepreneur with ₹2 crore in personal savings looking to build an AI startup outside Bengaluru could cut first-year burn by nearly ₹70 lakh. These savings come from:

• Rent reimbursements

• R&D reimbursements

• EPF support

• Electricity duty waivers

• Lower office rentals in Tier-II cities

Add to that the personal cost advantage: living in a Tier-II city can help founders save another ₹5–10 lakh annually, owing to significantly cheaper lifestyles.

For many first-time founders, these numbers represent the difference between scaling confidently and shutting shop prematurely.

A Long-Term Vision: Triple Software Exports by 2030

Karnataka has set an ambitious goal — tripling software exports by 2030. And the government believes that distributing tech activity beyond Bengaluru will be key to meeting this target.

For startups willing to be early movers in these markets, the opportunity extends beyond operational savings. As these cities develop into fuller tech hubs, early entrants might see substantial equity appreciation by the third year of their venture — a potential secondary benefit that often goes unnoticed.

Apply Early — Incentives Are Limited

The government has placed caps on several incentives — in some cases, only the first 100 applicants in each category may qualify. That makes timing critical.

Founders considering the shift are advised to:

• Apply early

• Check minimum investment requirements

• Ensure formal registration under the Karnataka IT Promotion Policy

• Consult tax advisers to understand compliance and audit implications

With demand expected to climb quickly, proactive applications may determine who benefits and who misses out.

A Strategic Nudge for India’s Next Startup Wave

For India’s startup ecosystem — now expanding beyond metros into new markets — Karnataka’s IT Policy 2025–30 feels timely. It acknowledges the realities of today’s founder journey: high costs, tight funding cycles, and the need for deeper, more distributed innovation infrastructure.

By turning Tier-II Karnataka into an attractive, cost-efficient alternative, the state is sending a strong message: the future of Indian tech doesn’t have to be built in just one city.

And for founders trying to stretch every rupee of runway, that message might be exactly what they need to hear right now.