Tax exemption for startups under Section 80-IAC of the Income-tax Act, 1961

Section 80-IAC of the Income-tax Act, 1961 was introduced with effect from 1 April 2017 to extend tax relief to eligible startups operating in India. Under this section, recognised startups are entitled to claim a 100% tax deduction on their profits for a block of three consecutive years. The provision is applicable to recognised Private Limited Companies and LLPs incorporated on or after 1 April 2016 but before 31 March 2030.

Eligible startups can claim this deduction on profits and gains derived from an eligible business that is involved in innovation, development, or improvement of products or services, or follows a scalable business model with strong potential for job creation or wealth generation.

• It supports startups in their early years by offering significant tax benefits
• It promotes innovation, encourages research and development, and builds a vibrant startup ecosystem in India
• It encourages investment in startups and other qualifying ventures
• It motivates young entrepreneurs to operate as compliant taxpayers

• The assessee must be an LLP or a company engaged in an eligible business — one that focuses on innovation, development, or improvement of products, processes or services, or operates on a scalable model with significant potential for employment generation or wealth creation.
• The company or LLP must have been incorporated after 31 March 2016 and before 31 March 2030, and should not have been set up by splitting up or reconstructing an already existing business.
• The annual turnover must not exceed Rs. 100 crore in any previous year relevant to 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), Ministry of Commerce and Industry.
• The startup must obtain a certificate of eligible business from the Inter-Ministerial Board of Certification, as notified in the Official Gazette.
• Profits from the eligible business are computed as though it were the only source of income of the assessee for the relevant years.
• The business must not be formed by transferring previously used plant or machinery to a new concern. Old plant and machinery is permitted if its value does not exceed 20% of the total value of plant and machinery used.

A business that has been reconstructed or revived can still claim the deduction if it was re-established due to substantial damage, destruction caused by a natural disaster, or other unforeseen events (such as riots, civil disturbances, accidental fire or war) affecting any building, plant, machinery or furniture used for the business.