Tax Exemption for Startups Under Section 80-IAC of the Income-tax Act, 1961

Introduction

Section 80-IAC of the Income-tax Act, 1961 was introduced on 1 April 2017 to encourage the growth of eligible startups in India through tax incentives. Under this provision, recognised startups can avail a 100% deduction on eligible profits for three consecutive assessment years. The benefit is available to recognised Private Limited Companies and Limited Liability Partnerships (LLPs) incorporated on or after 1 April 2016 and before 31 March 2030.

What is Section 80-IAC?

Section 80-IAC was introduced to support startups during their early years by offering significant tax relief.

The provision encourages innovation, promotes research and development, and helps build a strong entrepreneurial ecosystem in India.

It also provides tax incentives to eligible domestic startups, encouraging investment and business growth.

In addition, the section promotes tax compliance by offering genuine startups the opportunity to reduce their tax burden through legal exemptions.

Benefits of Section 80-IAC

• Eligible startups can claim a 100% deduction on the profits and gains earned from the qualifying business under Section 80-IAC.
• The deduction can be claimed for any three consecutive assessment years out of the first ten years from the date of incorporation.
• Since the eligible income becomes fully deductible, startups are generally not required to pay advance tax for the relevant year if their tax liability becomes nil.
• The tax benefit helps reduce the financial burden during the initial years of business, allowing startups to utilise their funds more effectively for operations and expansion.
• The application process is simple and can be completed online without paying any government fee, making it easier for eligible startups to claim the available tax exemption.

Eligibility Criteria for Tax Exemption Under Section 80-IAC

To claim the tax deduction available under Section 80-IAC of the Income-tax Act, 1961, a startup must satisfy the following conditions:

• The assessee must be a Private Limited Company or a Limited Liability Partnership (LLP) engaged in an eligible business. An eligible business refers to a startup involved in innovation, development, improvement of products, processes, or services, or one that operates a scalable business model with the potential to generate significant employment or wealth.
• The company or LLP must be incorporated after 31 March 2016 and before 31 March 2030.
• The annual turnover of the startup should not exceed ₹100 crore in the financial year preceding the assessment year for which the deduction is claimed.
• The startup must be recognised by the Department for Promotion of Industry and Internal Trade (DPIIT) under the Ministry of Commerce and Industry, Government of India.
• It should possess a Certificate of Eligible Business issued by the Inter-Ministerial Board of Certification, as notified by the Central Government.
• The business should not be formed by splitting up or reconstructing an existing business.
• It should not be established by transferring previously used plant or machinery. However, previously used machinery can be utilised if its value does not exceed 20% of the total value of the plant and machinery used in the new business.
• For computing the deduction under Section 80-IAC, the profits and gains of the eligible business are calculated as though it is the sole source of income of the assessee during the relevant previous year.

However, a reconstructed or re-established business may still qualify for the deduction if it has been revived after suffering extensive damage or destruction due to:

• Natural calamities.
• Accidental fire.
• Riots or civil disturbances.
• War or other unforeseen events affecting the building, plant, machinery, or furniture used in the business.

How to Apply for Exemption Under Section 80-IAC?

To claim the deduction under Section 80-IAC, the eligible startup must obtain a certificate from the Inter-Ministerial Board of Certification by following these steps:

Step 1: Log in to the Startup India portal and apply for DPIIT recognition by completing the Startup India registration process.

Step 2: Select the “Claim Tax Exemption” option and complete the application form by providing the following information:

• Startup name
• Date of incorporation
• Registered address and business location
• Incorporation or registration number
• Nature of business (LLP or Private Limited Company)
• DPIIT recognition number
• Contact details, including email address, phone number, and PAN of the entity

Step 3: Upload the required documents in PDF format, including:

• LLP Deed (for LLPs)
• Memorandum of Association (for Private Limited Companies)
• Board Resolution, if applicable
• CA-certified Balance Sheet and Profit & Loss Statement
• Financial statements for the last three years or from the date of incorporation, whichever is applicable
• Income Tax Returns for the last three years or since incorporation
• Link to the startup’s video pitch
• Pitch Deck in PDF format

Note: If the startup has also received Angel Tax Exemption, the relevant details must be provided during the application process.

Conclusion

Section 80-IAC of the Income-tax Act, 1961 provides valuable tax benefits to eligible startups by allowing them to claim deductions on qualifying profits. The provision supports innovation, encourages the development of new products and services, and provides financial relief during the early stages of business. By reducing the tax burden, it contributes to the long-term growth, stability, and expansion of startups while strengthening India’s entrepreneurial ecosystem.

Frequently Asked Questions (FAQs)

1. What is Section 80-IAC of the Income-tax Act?
Section 80-IAC provides eligible startups with a tax deduction on profits and gains for three consecutive assessment years out of ten years from the year of incorporation, subject to prescribed conditions.

2. Which startups are eligible for tax exemption under Section 80-IAC?
Eligible startups must be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) and satisfy the conditions specified under the Income-tax Act and related notifications.

3. What is the benefit available under Section 80-IAC?
Eligible startups can claim a 100% deduction of their eligible profits and gains for any three consecutive assessment years within the specified eligibility period.

4. Is DPIIT recognition mandatory to claim the Section 80-IAC benefit?
Yes, DPIIT recognition is one of the key eligibility requirements for claiming the tax deduction under Section 80-IAC.

5. Can every startup claim tax exemption under Section 80-IAC?
No, only startups that meet the prescribed eligibility criteria and obtain the necessary recognition and approvals can claim the deduction.

6. How many years can a startup claim the tax deduction?
A startup can claim the deduction for three consecutive assessment years, chosen within the eligible period allowed under the law.

7. What documents are required to claim the deduction under Section 80-IAC?
Commonly required documents include DPIIT recognition, incorporation documents, audited financial statements, income tax returns, and other supporting records.

8. Can LLPs claim tax exemption under Section 80-IAC?
Yes, eligible LLPs recognized as startups by DPIIT may claim the deduction, provided they satisfy all applicable conditions.

9. Does claiming Section 80-IAC exemption eliminate all tax liabilities?
No, the deduction applies only to eligible business profits. Other tax provisions and compliance requirements may still apply.

10. Can a startup claim Section 80-IAC along with other tax benefits?
Yes, startups may be eligible for other incentives, provided they meet the respective conditions and there is no restriction under the applicable provisions.

11. What happens if a startup no longer meets the eligibility conditions?
If the startup fails to satisfy the prescribed conditions, it may lose eligibility to claim the deduction under Section 80-IAC.

12. Why should startups seek professional assistance for claiming Section 80-IAC benefits?
A tax professional can help verify eligibility, ensure compliance with legal requirements, prepare documentation, and maximize the available tax benefits while avoiding errors.