TAX HOLIDAY FOR STARTUPS (SECTION 80 IAC OF INCOME TAX ACT)

Startups in India:

In India’s evolving entrepreneurial environment, startups play a major role in driving innovation, creating employment, and supporting economic development. Recognizing their importance, the Indian government has introduced favourable tax provisions to reduce the financial burden on entrepreneurs and encourage innovation.

DPIIT (Department for Promotion of Industry and Internal Trade)-recognized startups in India can potentially save lakhs or even crores in taxes. Section 80 IAC of the Income Tax Act provides eligible startups with an opportunity to claim a 100% tax exemption. This is considered one of the key benefits available through Startup India registration.

Section 80 IAC:

Section 80IAC of the Income Tax Act, 1961, is a special provision applicable to eligible startups. It came into effect from 1st April 2017. Under Section 80-IAC, the Central Government provides eligible startups with a tax deduction equal to 100% of the profits and gains earned from an eligible business.

The objective of this provision is to reduce tax evasion. By offering this tax benefit, the provision also encourages young entrepreneurs in India to comply with tax requirements and become responsible taxpayers.

Eligible Startups as per Section 80IAC:

• Incorporated as a Private Limited Company or registered as a Limited Liability Partnership.
• Holds a certificate of eligible business issued by the Inter-Ministerial Board of Certification.
• Incorporated on or after 01-04-2016 but before 01-04-2025.
• Has an annual turnover not exceeding Rs. 100 crore in the previous year relevant to the assessment year for which the deduction is claimed.

Eligible Business as per Section 80IAC:

For the purpose of Section 80 IAC, an eligible business refers to a business operated by an eligible startup that is involved in innovation, development, or improvement of products, processes, or services, or operates a scalable business model with significant potential for employment generation or wealth creation.

Quantum of Exemption that Can Be Availed by Startups:

Eligible startups can claim a 100% deduction of profits earned from the eligible business for three consecutive financial years of their choice within the first ten years from the year of incorporation.

Who Can Apply for 80 IAC Tax Exemption?

Eligibility for the 80IAC tax exemption depends on factors such as DPIIT recognition, the age of the startup, and its overall turnover. Businesses that satisfy the requirements for an eligible startup and eligible business can apply, provided all prescribed conditions are fulfilled.

Conditions Relating to Formation and Transfer of Plant and Machinery:

1. The startup should not be established through the transfer of existing plant and machinery that was previously used.

Exceptions:

Imported second-hand plant and machinery that has not been used by the assessee may qualify if the following conditions are satisfied:

• The plant and machinery is imported.
• It was not used in India before being installed by the entity.
• No depreciation was claimed in India by the assessee or any other person before its installation by the entity.
• The value of the second-hand plant and machinery does not exceed 20% of the total value of the plant and machinery used in the business.

2. The startup should not be formed by splitting up or reconstructing an existing business.

Exceptions:

Reconstructed businesses may claim the 80IAC exemption if they fall within the provisions of Section 33B of the Income Tax Act. This section permits a reconstructed industrial undertaking to claim the 80IAC tax exemption if the business was discontinued due to damage or destruction caused by:

• Natural calamities
• Riots or civil disturbances
• Accidental fire or explosion
• An act of the enemy

Eligibility Summary for Applying for 80 IAC Exemption:

• Must be either a company or an LLP
• Startup must have DPIIT recognition
• Incorporated after 1st April 2016
• Not more than 10 years old from the date of incorporation
• Must be a new and original entity
• Must operate with new plant and machinery
• Turnover should not exceed Rs. 100 crores
• Must have an objective of employment generation or wealth creation
• Must be engaged in innovative products, services, or processes

Process to Claim 80 IAC Tax Exemption:

Step 1: Log in to the Startup India portal – https://startupindia.gov.in/

The first step toward claiming the tax deduction is to create an account on the Startup India portal. After that, you need to apply for the DPIIT recognition certificate by following the Startup India registration procedure.

Step 2: Fill in the Details

Once you have logged in to the portal and selected the ‘claim tax exemption’ option, you need to complete the application form with the required information.

• Name of Startup
• Date of Incorporation
• Incorporation/registration number
• Address and business location
• Nature of Business (whether LLP or PLC)
• DIPP number
• Contact details, including phone number, email ID, and PAN of the entity

Step 3: Submit Documents Required for 80 IAC Tax Exemption

Along with the above information, a startup applying for the 80IAC deduction must submit the following documents in PDF format:

• Memorandum of Association (if PLC)
• Limited Liability Partnership Deed (if LLP)
• Board Resolution (if applicable)
• Balance sheet and profit and loss account of the entity for the immediately preceding 3 financial years, certified by a Chartered Accountant
• Income Tax Returns for the previous 3 years or from the date of incorporation
• Startup video link and pitch deck

Applicability of MAT for Startups Covered Under Section 80 IAC:

The applicability of MAT provisions under Section 115JB of the Income Tax Act can create challenges for eligible startups, as these provisions take precedence over other tax provisions. As a result, startups may be required to pay tax at the rate of 15%, along with applicable surcharge and health and education cess, on their profits.

However, when Section 115JB applies, the entire tax paid under MAT provisions during the years in which the Section 80IAC exemption is claimed becomes blocked. This amount is converted into MAT credit, which can be used to offset the difference between tax calculated under the normal provisions and the tax payable under Section 115JB in subsequent years.

The MAT credit can only be utilized in years when the tax calculated under the normal provisions is higher than the tax calculated under the MAT provisions. In addition, the credit can be carried forward for a maximum period of 15 years. If the startup does not have a higher tax liability under the normal provisions during this period, the MAT credit may ultimately become redundant.

As a result, the practical benefit of the startup tax holiday may be reduced in such circumstances, making the exemption less effective for the startups affected by these provisions.

Conclusion:

In conclusion, Section 80-IAC of the Income Tax Act, 1961, provides an important tax incentive for domestic startups by encouraging innovation and creating a supportive environment for business growth. However, eligibility for this deduction depends on startups undergoing detailed audits by chartered accountants. These audits help ensure financial transparency and accountability while supporting the government’s objective of developing a reliable business ecosystem. The role of chartered accountants in verifying financial integrity is therefore important in connecting tax incentives with responsible financial practices.

Disclaimer

This content is for informational purposes only and reflects provisions of the Income Tax Act as amended up to FY 2025–26. Please consult a Chartered Accountant for professional advice.