Section 80-IAC of the Income-tax Act, 1961- A Comprehensive Guide for Startups in India

By Rupin Chopra and Shantam Sharma

Introduction

India’s startup ecosystem has witnessed exponential growth over the last decade, supported by progressive policy measures and targeted fiscal incentives. One of the most significant tax incentives introduced by the Government of India is the tax holiday under Section 80-IAC of the Income-tax Act, 1961[1], which aims to reduce the financial burden on startups during their formative and scale-up years.

Recognising that early-stage enterprises often prioritise reinvestment over profitability, Section 80-IAC provides eligible startups with thae opportunity to claim a 100% deduction of profits and gains derived from eligible business activities for a limited period. When utilised strategically, this provision can materially improve cash flows, enhance valuation, and strengthen long-term sustainability.

Legislative Intent and Evolution

Section 80-IAC was introduced as part of the broader Startup India initiative, reflecting the government’s intent to promote innovation, entrepreneurship, and employment generation. Over time, the provision has been refined through successive Finance Acts to expand its applicability and remove practical bottlenecks.

Key policy developments include:

• Expansion of the eligibility window for incorporation, now extended up to 31 March 2030;
• Increase in the turnover threshold to accommodate scaling startups;
• Introduction of a structured certification mechanism through DPIIT and the Inter-Ministerial Board (IMB) to ensure that benefits are granted to genuine, innovation-driven enterprises.

These changes underline a clear policy shift from restrictive eligibility to facilitative growth support.

Nature and Scope of Deduction

Under Section 80-IAC, an eligible startup is entitled to claim:

• A 100% deduction of profits and gains derived from eligible business activities;
• For any three consecutive assessment years;
• Out of a total period of ten years beginning from the year of incorporation.

Importantly, startups are not required to claim the deduction from the first year of profitability. The law allows flexibility to choose the most commercially advantageous years, enabling businesses to align tax planning with revenue maturity and funding cycles.

Why Section 80-IAC Matters for Startups

The practical advantages of the Section 80-IAC tax holiday extend well beyond immediate tax savings:

• Capital conservation during early and growth stages
• Improved cash flow, enabling reinvestment into product development, talent acquisition, and market expansion
• Enhanced investor confidence, as tax-efficient structures often improve post-tax returns
• Strategic flexibility, allowing startups to optimise deductions during peak profitability
• Reduced compliance pressure in high-growth phases

When combined with other startup-friendly policies, Section 80-IAC can significantly influence a startup’s financial trajectory.

Eligibility Criteria under Section 80-IAC

To claim benefits under Section 80-IAC, a startup must satisfy both commercial and regulatory conditions.

1. DPIIT Recognition
   The entity must be recognised as a “Startup” by the Department for Promotion of Industry and Internal Trade (DPIIT). For such recognition:
   • The entity must be incorporated as a:
     • Private Limited Company, or
     • Limited Liability Partnership (LLP), or
     • Registered Partnership Firm;
   • Annual turnover must not exceed INR 200 crore[2] in any financial year;
   • The entity must be within 10 years from the date of incorporation;
   • The business should be innovation-driven, focused on development or improvement of products, services, or processes, or demonstrate scalable potential with employment or wealth-creation impact.
2. Eligible Legal Structure
   While DPIIT recognition is available to partnership firms as well, tax deduction under Section 80-IAC is restricted only to:
   • Private Limited Companies, and
   • Limited Liability Partnerships (LLPs).
3. Period of Incorporation
   The startup must be incorporated on or after 1 April 2016 and on or before 31 March 2030, as per the current statutory framework.
4. Inter-Ministerial Board Certification

In addition to DPIIT recognition, the startup must obtain a Certificate of Eligible Business from the Inter-Ministerial Board of Certification (IMB), as notified by the Central Government. This certification is critical and is often the most scrutinised step in the entire process.

Circumstances Where Deduction Is Denied

Section 80-IAC expressly excludes businesses that do not represent genuine entrepreneurial activity. Accordingly, the deduction shall not be available where:

• The startup is formed by splitting up or reconstruction of an existing business; or
• The business is formed by transfer of previously used plant or machinery, beyond the permissible limits prescribed under the Act.

These restrictions are intended to prevent misuse of the tax holiday by restructured or legacy businesses.

Application Process

The process for availing benefits under Section 80-IAC is entirely digital and is routed through the Startup India portal:

1. Registration on the Startup India platform
2. Obtaining DPIIT Startup Recognition
3. Applying for Section 80-IAC exemption through the portal
4. Submission of prescribed documents and declarations
5. Review and certification by the Inter-Ministerial Board
6. Claiming deduction in the income-tax return for the relevant assessment years

Given the technical scrutiny involved, startups are advised to ensure accuracy and consistency across filings.

Key Documentation Typically Required

While documentation may vary based on the nature of the business, the following are commonly required:

• Incorporation and constitutional documents
• Business description and innovation brief
• Shareholding and management details
• Board or partner resolutions
• Audited financial statements and tax returns
• Chartered Accountant’s certification
• Pitch deck and scalability assessment
• Intellectual property details, if any
• Employment and HR declarations

Strategic Considerations and Practical Insights

While Section 80-IAC offers substantial benefits, it is not a “plug-and-play” exemption. Startups must carefully evaluate:

• The timing of claim to maximise benefit;
• Alignment between business model and innovation criteria;
• Long-term tax implications, especially in light of funding rounds and exits.

Regulatory non-compliance or premature claims can lead to denial or future litigation, negating the intended advantage.

Conclusion

Section 80-IAC represents a powerful tax planning tool for Indian startups, designed to reward innovation and risk-taking. However, the provision is condition-driven, certification-oriented, and closely scrutinised by tax authorities. Startups seeking to avail this benefit must adopt a structured and well-advised approach to eligibility assessment, documentation, and timing of claims.

Jatin Sharma, Intern at S.S.Rana & Co. has assisted in the research of this article.

[1] https://www.startupindia.gov.in/content/sih/en/form80iac.html

[2] https://www.dpiit.gov.in/static/uploads/2026/02/119e52e2a36f652215a32c3ccc5f9c66.pdf