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Overview
Tax Exemption for Startups Under Section 80-IAC
Section 80-IAC of the Income-tax Act, 1961, introduced on April 1, 2017, provides a significant tax incentive for eligible startups by allowing a 100% tax deduction on profits for three consecutive assessment years. This benefit is designed to support startups during their crucial growth phase by reducing their tax burden and improving cash flow.
The exemption applies to companies and Limited Liability Partnerships (LLPs) engaged in eligible businesses that focus on innovation, development, or improvement of products and services. It also covers scalable business models with strong potential for employment generation or wealth creation, making it a key advantage for startups aiming to expand and attract investment.
Application process
How to Apply for Tax Exemption Under Section 80-IAC
The exemption process is fully online — follow these steps to assess eligibility and submit your application on the Startup India portal.
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DPIIT Registration
Register your startup on the Startup India portal and apply for DPIIT recognition (Startup India registration, basic company details, incorporation documents).
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Apply for Tax Exemption
Select the "Claim Tax Exemption" option and fill in required details (startup name, date of incorporation, business address, registration number, entity type, DPIIT number, contact details including email, phone, and PAN).
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Submit Documents & Financials
Upload all required documents in PDF format (LLP Deed/MOA, board resolution, CA-certified financials, balance sheet & P&L, ITRs, pitch deck, and video pitch link for evaluation).
Purpose
Purpose of Section 80-IAC
Section 80-IAC is designed to support startups during their early growth stages by offering significant tax relief. By reducing the financial burden on emerging businesses, it encourages innovation, promotes research and development, and helps startups reinvest their profits into scaling operations and building sustainable business models.
This provision also strengthens India's entrepreneurial ecosystem by motivating founders to operate within a formal, compliant structure. By offering tax incentives to eligible domestic companies, the government reinforces its commitment to fostering innovation-driven enterprises and creating opportunities for employment and economic growth.
Benefits
Benefits of Section 80-IAC
Eligible startups can unlock meaningful tax savings during their early growth years.
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100% Tax Deduction
Eligible startups can claim a full deduction on profits for three consecutive years, significantly reducing their tax liability during early growth stages.
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Advance Tax Relief
Startups availing this benefit have zero tax liability for the applicable period, eliminating the need to pay advance tax.
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Reduced Financial Pressure
Lower taxable income helps ease financial strain, allowing startups to allocate resources more efficiently toward growth and operations.
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Simple Application Process
The exemption process is fully online with no government fees, making it quick, accessible, and easy for eligible startups to apply.
Eligibility
Eligibility Criteria for Section 80-IAC
Startups must meet all prescribed criteria to qualify for the 80IAC tax holiday.
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Eligible Business
The startup must be engaged in innovation, development, or improvement of products, processes, or services, or operate a scalable business model with high potential for employment generation or wealth creation.
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Incorporation Period
The entity must be incorporated after March 31, 2016, and before April 1, 2025, as per the prescribed timeline to qualify for tax exemption under Section 80-IAC.
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Turnover Limit
The startup's annual turnover must not exceed INR 100 crores in the financial year preceding the assessment year in which the deduction is claimed.
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New Business Requirement
The startup should not be formed by splitting or reconstructing an existing business, except in cases of discontinuation due to unforeseen events like natural calamities or accidents.
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No Asset Transfer
The business must not be established by transferring previously used plant, machinery, or other significant assets from an existing business entity.
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Government Recognition & Certification
The startup must be recognized by the Ministry of Commerce and Industry (DPIIT) and obtain a certificate of eligibility from the Inter-Ministerial Board of Certification as notified in the Official Gazette.
Angel tax
Section 56 Exemption for Startups (Angel Tax)
Section 56(2)(viib) of the Income-tax Act, commonly referred to as "Angel Tax," applies when startups issue shares at a premium to investors. Eligible startups recognized by DPIIT can claim exemption from this tax by meeting prescribed conditions and filing the required declaration. The total investment received should not exceed INR 25 crores, excluding investments from specified categories of investors.
This exemption significantly reduces the tax burden on early-stage startups and encourages investor participation by ensuring that genuine funding is not treated as taxable income, thereby supporting innovation and business growth.
Why TargoLegal
Why Choose Targolegal for Startup Tax Exemptions?
Targolegal provides end-to-end assistance in securing exemptions under Section 80-IAC and Section 56. From eligibility assessment to documentation and filing, our experts ensure your startup meets all compliance requirements without delays.
Simplify the process, avoid costly errors, and maximize your tax benefits with reliable and affordable expert support.
Get started
Start your tax exemption journey
Connect with our startup tax experts to assess your eligibility and obtain tax exemption benefits under Sections 80IAC and 56 while ensuring full regulatory compliance.
- Section 80IAC tax holiday eligibility & filing
- Section 56 angel tax exemption support
- DPIIT recognition & documentation guidance
Get started today
Connect with our startup tax experts to assess your eligibility and obtain tax exemption benefits under Sections 80IAC and 56 while ensuring full regulatory compliance.
Unlock tax benefits
Unlock tax benefits that accelerate your startup's growth. Get expert assistance to apply and stay compliant with ease — from eligibility assessment through documentation and filing under Sections 80IAC and 56.
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FAQ
Frequently asked questions
Section 80IAC provides tax exemptions for startups meeting specific eligibility criteria. The primary benefit is a tax holiday, allowing startups to claim a 100% tax exemption on their income for 3 consecutive years within the first 7 years of operations to promote innovation and growth.
- Must be incorporated as a Private Limited Company or LLP.
- Must be less than 10 years old from the date of incorporation.
- Annual turnover must not exceed ₹100 crore.
- Must work towards innovation or improvement of products/services.
- Must be recognized by DPIIT under the Startup India scheme.
This provision exempts DPIIT-recognized startups from tax on share premiums received. When shares are issued above face value, the premium is normally taxed as "income from other sources," but startups are exempt if shares do not exceed the Fair Market Value (FMV).
FMV is determined by a Valuation Report from a registered valuer using methods like Discounted Cash Flow (DCF) or Net Asset Value (NAV). For the Section 56 exemption to apply, the issuance price must be equal to or lower than the FMV.
Yes. These exemptions are independent and can be availed simultaneously, provided the startup meets the eligibility criteria for both the tax holiday (80IAC) and the share premium exemption (56(2)(viib)).
- Obtain DPIIT recognition under the Startup India Scheme.
- Ensure share issuances comply with FMV guidelines and valuation reports.
- File the Income Tax Return (ITR) and claim exemptions using the Startup India Certificate.
- Provide all necessary documentation, including financial statements and valuation reports, during tax filing.
Startups can avail of a 100% tax exemption for 3 consecutive years out of the first 7 years (now extended to 10 years for some categories) from incorporation. The startup can choose the 3-year block based on its financial performance and profitability.
If shares are issued at a price higher than the FMV, the excess amount is treated as "income from other sources" under Section 56(2)(viib) and taxed. The startup may also face penalties if the valuation process is not strictly followed.
Yes, foreign investors can avail of these benefits when investing in a DPIIT-recognized startup. This allows Foreign Direct Investment (FDI) without taxing the share premium, subject to valuation norms and specific conditions outlined by the CBDT.
There is no specific upper limit on the total investment amount, provided the shares are issued at FMV. The exemption remains valid as long as the startup adheres to regulatory requirements and the valuation is properly documented by a registered valuer.
