TAX HOLIDAY FOR STARTUPS (SECTION 80 IAC OF INCOME TAX ACT)
Startups in India:
In India’s fast-growing entrepreneurial ecosystem, startups play a key role in driving innovation, generating employment, and supporting economic development. Recognizing their importance in shaping the future, the Indian government has introduced favourable tax provisions to reduce the financial burden on entrepreneurs and promote innovation.
DPIIT (Department for Promotion of Industry and Internal Trade)-recognized startups in India can save lakhs or even crores in taxes. Section 80 IAC of the Income Tax Act provides eligible recognized startups with a 100% tax exemption. This is considered one of the major benefits available under 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. Section 80-IAC provides eligible startups with a tax deduction equal to 100 percent of the profits and gains earned from the eligible business.
The objective of this provision is to reduce tax evasion. Consequently, this tax benefit encourages young entrepreneurs in India to become compliant and responsible taxpayers.
Eligible startups as per Section 80IAC:
- Incorporated as a Private Limited Company or registered as a Limited Liability Partnership.
- It holds a certificate of eligible business from the Inter-Ministerial Board of Certification.
- It is incorporated on or after 01-04-2016 but before 01-04-2025.
- Should have 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, eligible business refers to a business carried out by an eligible startup that is engaged 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:
Startups can claim a 100% deduction on profits derived from the eligible business for a block of three consecutive financial years of their choice out of the first ten years beginning from the year of incorporation.
Who can apply for 80 IAC tax exemption?
Eligibility for the 80IAC tax exemption is determined by factors such as DPIIT recognition, the age of the startup, and its total business turnover. Businesses that qualify as eligible startups and carry out eligible business activities can apply, provided they satisfy all the required conditions.
Conditions relating to formation and transfer of plant and machinery:
- The startup must not be established through the transfer of existing plant and machinery that has already been used.
Exceptions:
Imported second-hand plant and machinery, which 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 at any time 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.
- The startup must not be created by splitting up or reconstructing an existing business.
Exceptions:
Reconstructed businesses may claim 80IAC exemption if they qualify under Section 33B of the Income Tax Act. This section permits a reconstructed industrial undertaking to claim 80IAC tax exemption if its operations were discontinued due to damage or destruction caused by:
- Natural calamities
- Riots / civil disturbances
- Accidental fire/explosion
- An act of the enemy
Eligibility Summary for applying for 80 IAC Exemption:
- Either a company or an LLP
- Startup Recognition by the DPIIT
- Incorporated after 1st April, 2016
- Not Exceeded 10 years since Incorporation
- New and Original Entity
- Operates with New Plant and Machinery
- Turnover not exceeding Rs.100 crores
- Objective of employment generation or wealth creation
- Must deal in innovative products, services, or processes
Process to claim 80 IAC tax exemption:
Step 1: Log in to Startup India portal – https://startupindia.gov.in/
To begin the tax deduction claim process, create your Startup India login. You must then apply for the DPIIT recognition certificate by completing the Startup India registration process.
Step 2: Fill in the details
After logging into the portal and selecting ‘claim tax exemption’, you need to complete the required form with the following details:
- Name of Startup;
- Date of Incorporation;
- Incorporation/registration number;
- Address and Business location;
- Nature of Business (whether LLP or PLC);
- DIPP number; and
- Contact Details (namely Phone No., E-mail ID, and PAN number of entity).
Step 3: Submit documents required for 80 IAC tax exemption
Along with the information mentioned above, a startup applying for 80IAC deductions must submit the following documents in PDF format:
- Memorandum of Association (if PLC)
- Limited Liability Partnership Deed (if LLP)
- Board Resolution (if any)
- Balance sheet and profit and loss account of the entity for the immediately preceding 3 financial years (the financial statements should be certified by a Chartered Accountant).
- Income Tax Returns for either the past 3 years or from the date of incorporation;
- Start-up video link and pitch deck.
