Tax Exemption for Startups under Section 80 IAC under Income Tax Act

Newly established and incorporated startups often face shortage of financial resources during their initial stages of operations. This further has a negative impact on their sales and profits. The situation further gets worsened when out of the minimal income they earn, a huge chunk is paid as taxes. Hardly, any profit is left behind for reinvestment.

Indian government, realising this struggle, has allowed several tax exemptions for Startups under Section 80ICA Section 80 IAC of the Income Tax Act, is the provision that allows recognised startups to get a 100% tax exemption for 3 consecutive profit-making years. This can be said to be one of the most important benefits of startup India registration.

Section 80IAC of the Income Tax Act 1961 is a special section in respect of the specified business. It came into effect on 1st April 2017. According to this section, an eligible assessee that is making profits can claim 100% tax deductions for any three consecutive years. People commonly refer to it as 80IAC deduction for eligible startups.

 The 80IAC Tax exemption criteria depend on factors like DPIIT Recognition, age of the startup, and its overall business turnover. Also, the innovation factor in its products or services is crucial for claiming the tax exemption. We have explained all the 80IAC tax exemption eligibility criteria below. Ensure that all these criteria are met before the application for 80IAC exemption is actually filed.

Either a company or an LLP or registered partnership firm:

The startup must either be a Company or a Limited Liability Partnership or registered as a partnership firm. Startups established as any other business structure cannot claim this deduction.

Startup Recognition by the DPIIT:

The Department of Promotion of Industry and Internal Trade must recognize startups and the Startup has obtained DPIIT Recognition Certificate.

Incorporated after 1st April, 2016:

Any startup incorporated/registered after the 1st of April 2016 but before April,1 2025 can avail the tax exemption u/s 80IAC

Not Exceeded 10 years since Incorporation:

Deduction can be claimed in any three years within the first 10 years from the Startup’s incorporation.

New and Original Entity:

The startup must not be formed by splitting up or reconstruction of an existing business entity. There are few exceptions u/s 33B of the Income Tax Act.

Operates with New Plant and Machinery:

The startup must not be formed by the transfer of existing plant and machinery already in use.

 Turnover not exceeding Rs.100 crores:

The turnover must not exceed Rs.100 crores in the Financial Year for which the deduction is claimed.

Objective of employment generation or wealth creation:

The startup must be operating with the primary aim of financial growth, employment generation, and wealth creation.

Must deal in innovative products, services, or processes:
The concerned startup must either develop new innovative products, services, or processes, or innovate an improved version of the existing ones. However, the entities formed by splitting up or reconstruction of an existing business are not eligible for DPIIT Startup Tax Benefits.

Key Features of 80IAC Tax Exemption:

• DPIIT Recognition Required
• 100% Tax Exemption
• Tax Exemption for 3 Years
• Online Application Process
• Free of Cost Filing

Process to claim 80 IAC tax exemption

Once you know that you can claim a tax exemption under section 80 IAC of the Income Tax Act, you can apply for the tax deduction claim by following these steps.

Step 1: Log in to startup India portal 

The first step in claiming a tax deduction is to create your startup India login. Then, you need to apply for DPIIT recognition certificate. You can do so, by following the steps of the startup India registration process.

Step 2: Fill in the details 

After logging in to the portal and selecting ‘claim tax exemption’ you need to fill in the form.

1. Name of Startup;
2. Date of Incorporation;
3. Incorporation/registration number;
4. Address and Business location;
5. Nature of Business (whether LLP or PLC);
6. DIPP number; and
7. Contact Details (namely Phone No., E-mail ID, and PAN number of entity).

Step 3: Submit documents required for 80 IAC tax exemption 

Apart from the information mentioned above, a startup opting for 80IAC deductions needs to submit the following documents in a PDF format:

1. Memorandum of Association (if PLC);
2. Limited Liability Partnership Deed (if LLP);
3. Board Resolution (if any);
4.  CA certified balance sheet and Profit and Loss statements;
5. Financial Statements for either the past 3 years or for all the years since incorporation;
6. Income Tax Returns for either the past 3 years or from the date of incorporation;
7. Link to a video pitch of the startup; and
8. Pitch Deck in PDF format.

Apart from these documents, if your startup has also received the certificate of angel tax exemption, then you need to provide the details for the same.

Once you have submitted the form for section 80 IAC tax exemption, you need to wait for the approval.

Frequently Asked Questions

What is Section 80 IAC tax incentives for startups?

This provision of the Income Tax Act was introduced in 2016 to support the startup India scheme. This section provides a 100% deduction of the tax requirement for three consecutive years to eligible businesses.

Who is an eligible business under section 80 IAC? 

As per section 80 IAC of income tax Act, an eligible business is a business that involves innovation, development, deployment, or commercialization of new products, processes, or services driven by technology or intellectual property.

How can I check the status of my application for Tax Exemption under section 80IAC of the Income Tax Act? 

You can check the status of your application for tax exemption by visiting the Startup India Portal. All you need to do is log in to your account and then click ‘Dashboard’.

Which authority issues the Tax exemption certificate under section 80IAC?

The tax benefits for startups are governed by the Department for Promotion of Industry and Internal Trade (DPIIT). Hence, all certificates are issued by the DPIIT.

 Does having a DPIIT certificate imply I am entitled to Tax exemption?

No, having a DPIIT certificate is only one of the reasons why you are eligible to apply for the tax exemption. There are more eligibility criteria that you need to fall under, to get tax exemption under section 80IAC of the Income Tax Act.

What is an eligible startup according to section 80 IAC?

 An eligible startup means a company or a limited liability partnership that:

a). is incorporated on or before 1st April 2016 but before 1st April 2023 (as amended in the Union Budget 2023);

b). total turnover does not exceed Rs. 25 crores; and

c). holds certificate of eligible business from the Inter-Ministerial Board of Certification