Section 80-IAC – Startup Tax Holiday under IncomeTax Act.
This is a great incentive for Startups in terms of savings from the Tax liabilities.
Section 80-IAC of the Income Tax Act provides a tax holiday to eligible startups in India. It offers a 100% deduction on profits for any three consecutive years out of 10 Years.
The provision was introduced as part of the Startup India initiative to reduce the tax burden on new businesses during their formative years.
This section allows eligible startups to claim 100% deduction of profits for 3 consecutive assessment years out of 10 years since its incorporation at the option of the Startup.
Eligibility Criteria for claiming tax exemption:
1. Entity Type:
The startup must be a Private Limited Company or Limited Liability Partnership (LLP). Only startups Registered in India is eligible.
2. Incorporation Period:
The startup should be incorporated between 01st April 2016 and 31st March 2025.
3. Turnover Limit:
The annual turnover must be less than ₹100 crores in any of the previous years relevant to the deduction period.
4. Startup Recognition:
The eligible startup must be recognized by DPIIT (Department for Promotion of Industry and Internal Trade) as an eligible startup for claiming the tax exemption….
5. Innovation Requirement:
Thus is a very important requirement The entity must be working towards any innovation, development, improvement of products, processes, or services, or technology etc. Normal businesses won’t be eligible for claiming aa a Startup for claiming the benefit under this section.
Another point is that it should be scalable business model with high potential of employment generation or wealth creation.
6. The startup must not formed by splitting / reconstruction of any existing business.
It should not be formed by transfer of previously used plant or machinery (with some exceptions).
Tax Benefit under Section 80 IAC:
100% tax exemption on profits for any 3 consecutive years (chosen by the company out of first 10 years from incorporation).
These deductions are available only if conditions above are satisfied in letter and spirit.
How to apply for the exemption:
The application process involves applying for Startup India recognition on the official portal, followed by applying for the 80-IAC tax exemption through the same portal.
The application is then evaluated by an Inter-Ministerial Board (IMB) which, upon approval, issues a certificate. The startup can subsequently claim the deduction in its Income Tax Returns for the chosen years.
Important considerations
The tax holiday only applies to profit from the eligible business, not other income sources. Startups can strategically claim the exemption during profitable years within the 10-year window. They can choose the years in which they want to claim exemption based on the profitability of the company.
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