[Corresponding Provision under Section 140 of the Income-tax Act, 2025 (effective from 1 April 2026)]

Tax Holiday for Eligible Start-ups in India

Introduction

India has rapidly emerged as one of the largest start-up ecosystems globally. To strengthen this momentum, the Government, through the Department for Promotion of Industry and Internal Trade (DPIIT), introduced the Startup India initiative. A central fiscal incentive under this initiative is the income-tax holiday provided under Section 80-IAC of the Income-tax Act, 1961 and the corresponding provision under the Income-tax Act, 2025.

This article provides a structured overview of the provision, its eligibility framework, the procedural aspects of claiming the deduction, ineligibility triggers, and key practical considerations relevant to founders, finance teams, and professional advisors.

Legislative Background

Section 80-IAC was inserted by the Finance Act, 2016, with effect from Assessment Year 2017-18. The provision permits an eligible start-up, fulfilling prescribed conditions, to claim a 100% deduction of profits and gains derived from an eligible business for any three consecutive assessment years (corresponding to three consecutive financial years of claim) out of ten years, beginning from the year of incorporation.

The Finance Act, 2025 has further extended the window of eligibility by permitting incorporation up to 31 March 2030, thereby continuing the benefit for the next phase of start-ups.

With the enactment of the Income-tax Act, 2025 (effective from 1 April 2026), the start-up deduction has been carried forward without any substantive change in its core architecture. The corresponding provision is housed in Section 140 of the Income-tax Act, 2025, retaining the eligibility framework, the 100% deduction of eligible profits, and the three-out-of-ten-year benefit window. The conditions relating to DPIIT recognition, IMB certification, turnover threshold of Rs. 100 crore, and the period of incorporation up to 31 March 2030 continue to apply.

Accordingly, deductions claimed for periods up to AY 2026-27 will be governed by Section 80-IAC of the 1961 Act, and claims for AY 2027-28 onwards will be governed by the corresponding provision under the Income-tax Act, 2025.

Quantum of Deduction

• Deduction equal to 100% of profits and gains derived from the eligible business.
• Available for any three consecutive assessment years.
• To be chosen out of ten years beginning from the year of incorporation.
• The start-up may select the block of three years that is most beneficial, typically after profitability stabilises.

Eligibility Criteria

To claim the deduction, the following cumulative conditions must be satisfied:

1. Nature of Entity

• Must be incorporated as a Private Limited Company under the Companies Act, 2013, or as a Limited Liability Partnership under the LLP Act, 2008.
• Sole proprietorships and partnership firms (other than LLPs) are not eligible.

2. Period of Incorporation

• Incorporated on or after 1 April 2016.
• Pursuant to the Finance Act, 2025, the eligible incorporation window now extends up to 31 March 2030.

3. Turnover Threshold

• Total turnover must not exceed Rs. 100 crore in the previous year relevant to the assessment year for which the deduction is claimed.

4. Nature of Business

• Engaged in innovation, development, or improvement of products, processes, or services, or a scalable business model with a high potential for employment generation or wealth creation.

5. DPIIT Recognition and IMB Certificate

• Must hold a valid Certificate of Recognition from DPIIT.
• Must obtain a Certificate of Eligible Business from the Inter-Ministerial Board (IMB) constituted by DPIIT.

It is important to note that DPIIT recognition and approval under Section 80-IAC are separate compliances. Mere recognition as a start-up by DPIIT does not automatically entitle an entity to claim the deduction under Section 80-IAC. Separate approval from the IMB is required for availing the tax holiday.

6. Restriction on Reconstruction and Use of Old Assets

• Must not be formed by splitting up or reconstruction of a business already in existence.
• Must not be formed by the transfer of machinery or plant previously used, beyond the 20% limit permitted under the Act.

Snapshot of Key Parameters

Parameter	Position
Eligible Entity	Private Limited Company / LLP
Incorporation Period	1 April 2016 to 31 March 2030
Turnover Limit	Up to Rs. 100 crore in the relevant previous year
Deduction	100% of eligible profits
Period of Deduction	Any 3 consecutive years out of first 10 years
Approval Authority	Inter-Ministerial Board (IMB), DPIIT
Statutory Reference	Section 80-IAC, Income-tax Act, 1961 / Section 140, Income-tax Act, 2025

Procedure to Claim the Deduction

1. Obtain DPIIT Recognition through the Startup India portal by submitting incorporation details, business description, and supporting documents.
2. Apply for the IMB Certificate of Eligible Business by furnishing details of innovation, scalability, employment generation, and financial projections.
3. Upon receipt of the IMB Certificate, the start-up becomes eligible to claim the deduction.
4. Choose the optimal block of three consecutive assessment years within the first ten years from incorporation.
5. File the income-tax return within the due date specified under Section 139(1); failure to do so renders the assessee ineligible for the deduction under Section 80AC.
6. Furnish the audit report in Form 10CCB along with the return for the year of claim.

Interaction with Other Provisions

Minimum Alternate Tax (MAT) / Alternate Minimum Tax (AMT)

An eligible company claiming deduction under Section 80-IAC under the normal tax regime may still be subject to Minimum Alternate Tax (MAT) under Section 115JB on book profits. LLPs may similarly be subject to Alternate Minimum Tax (AMT), wherever applicable. Effective tax cost should therefore be evaluated keeping the MAT or AMT impact in view.

Concessional Tax Regime

Companies opting for Sections 115BAA or 115BAB are not eligible to claim specified deductions including deduction under Section 80-IAC. The choice of regime must therefore be made after evaluating the long-term tax implications, including the availability of brought-forward losses and other deductions.

Carry Forward of Losses

Section 79 of the Act provides relaxation to eligible start-ups in respect of the carry forward and set-off of losses, even where there is a change in shareholding, subject to the conditions specified therein.

Practical Considerations

• Block Selection: Selecting the right block of three years is critical. Generally, the deduction is most beneficial when the start-up has stabilised profits, rather than in the early loss-making years.
• Documentation: Adequate documentation supporting innovation, scalability, IP development, and employment generation should be maintained to substantiate the IMB application and withstand future scrutiny.
• Segregation of Eligible Business: Where the entity carries on multiple activities, separate books and clearly identifiable revenue and cost streams for the eligible business strengthen the deduction claim.
• Transfer Pricing Awareness: Cross-charges and related party transactions should be carefully evaluated to avoid disallowance under Section 80-IA(10) read with Section 80-IAC(2).
• Return Filing Discipline: Filing the return within the due date is non-negotiable; a delayed return forfeits the deduction entirely.

Ineligible Cases and Circumstances

Notwithstanding the broad availability of the deduction, the following cases and circumstances render a start-up ineligible for claiming the benefit under Section 80-IAC of the Income-tax Act, 1961 (and the corresponding provision under the Income-tax Act, 2025):

1. Ineligible Entity Forms

• Sole proprietorships.
• Partnership firms constituted under the Indian Partnership Act, 1932 (firms other than LLPs).
• Hindu Undivided Families, AOPs, BOIs, co-operative societies, and trusts.
• Public companies; the benefit is restricted to Private Limited Companies and LLPs.

2. Incorporation Outside the Eligible Window

• Entities incorporated before 1 April 2016.
• Entities incorporated after 31 March 2030 (post the Finance Act, 2025 extension).

3. Breach of Turnover Threshold

• Where total turnover in the previous year relevant to the assessment year for which deduction is claimed exceeds Rs. 100 crore.
• The threshold is tested every year; breach in any year renders the assessee ineligible for the deduction for that year, even if eligibility existed earlier.

4. Splitting Up or Reconstruction of Existing Business

• Start-up formed by splitting up of a business already in existence.
• Start-up formed by reconstruction of an existing business.
• Exception: re-establishment of an undertaking referred to in Section 33B (re-establishment after damage by flood, riot, civil disturbance, accident, fire, etc.) is not treated as reconstruction.

5. Transfer of Previously Used Plant and Machinery

• Start-up formed by the transfer of plant or machinery previously used for any purpose, beyond the permissible 20% of total value of plant and machinery used in the business.
• Imported plant and machinery is not treated as previously used if it was not used in India earlier, has been imported into India, and no depreciation has been allowed on it under the Act.

6. Absence of Statutory Approvals

• Start-up not holding a valid Certificate of Recognition from DPIIT.
• Start-up not holding the IMB Certificate of Eligible Business.
• Withdrawal, cancellation, or cessation of validity of the DPIIT recognition or IMB approval during the period of claim.

7. Nature of Business

• Businesses primarily engaged in trading or reseller activities without demonstrable innovation or scalability may face difficulty in obtaining IMB approval.
• Activities lacking demonstrable innovation, scalability, or employment generation potential.
• Mere rebranding, repackaging, or restructuring of an existing business presented as a new venture.
• Holding company structures or pass-through entities not engaged in operating business.

8. Opting for the Concessional Tax Regime

• A company that has opted for the concessional regime under Section 115BAA is not entitled to claim the deduction under Section 80-IAC for that and subsequent years.
• A manufacturing company that has opted for Section 115BAB is similarly disentitled.
• Once exercised, the option under Sections 115BAA or 115BAB cannot generally be withdrawn, and the loss of the start-up deduction may become permanent.

9. Procedural and Compliance Defaults

• Return of income filed after the due date prescribed under Section 139(1); the deduction is lost in entirety by virtue of Section 80AC.
• Non-furnishing of audit report in Form 10CCB along with the return.
• Failure to maintain separate books or identifiable records for the eligible business where multiple activities are carried on.

10. Related Party Transactions Not at Arm’s Length

• Profits arising from transactions with closely connected persons that are not at arm’s length may be re-determined under Section 80-IA(10), read with Section 80-IAC(2), and the deduction restricted accordingly.
• Inflated transfer pricing arrangements designed to shift profits into the eligible start-up may be disregarded by the Assessing Officer.

Common Reasons for Rejection by IMB

• Business model lacking demonstrable innovation, scalability, or differentiation.
• Trading or reseller activities without sufficient value addition or innovation.
• Inadequate financial projections or absence of supporting narrative.
• Restructuring or rebranding of an existing business presented as a new venture.

Conclusion

Section 80-IAC of the Income-tax Act, 1961, and its corresponding provision under the Income-tax Act, 2025, continue to be among the most meaningful direct tax incentives for the Indian start-up ecosystem. With the extended incorporation window up to 31 March 2030, eligible start-ups have a wider planning horizon to align their growth trajectory with the available tax holiday. The benefit, however, is contingent upon DPIIT recognition, IMB approval, and disciplined compliance with the procedural requirements of the Act.

Equally important is an awareness of the ineligibility triggers, including entity form, turnover breach, restructuring, opting into Sections 115BAA or 115BAB, and procedural lapses, each of which can result in a permanent loss of the deduction. A considered, well-documented approach to the claim, together with an evaluation of MAT or AMT exposure and the alternative tax regimes, allows founders and finance teams to make the most of this provision.

Disclaimer

This article has been prepared for general information and educational purposes only. It does not constitute professional advice or an opinion on any specific facts or circumstances. Readers are advised to refer to the relevant provisions of the Income-tax Act, 1961, the Income-tax Act, 2025, and the rules, notifications, and circulars issued thereunder, and to consult their own professional advisor before acting on the information contained herein.