Tax Advantages for Startups u/s 80-IAC

This document covers

1. Eligibility for Startup Recognition
2. Tax Exemption u/s 80-IAC of Income Tax Act
3. Amount of Deduction u/s 80-IAC
4. What is Eligible Startup?
5. What is Eligible Business?
6. Conditions to be fulfilled to register under 80-IAC

1. Eligibility for Startup Recognition

• Type of company: The startup should be incorporated as Private Limited Company or Limited Liability Partnership (LLP) or Partnership Firm.
• Turnover Threshold: Turnover should be less than Rs 100 crores in any of the previous financial years.
• Purpose: The startup should work towards innovation or improvement of existing products, services and processes and should have the potential to generate employment or create wealth.

  Note: Any entity or business formed by splitting up or reconstruction shall not be considered as startup.

• Duration: An entity shall be considered as startup upto 10 years from the date of incorporation.

2. Tax Exemption u/s 80-IAC of Income Tax Act

Once the companies are registered as startup under DPIIT, then they can apply for tax exemption u/s 80-IAC of Income tax act. Section 80-IAC helps the startup companies to increase the growth in the early phase of their business.

3. Amount of Deduction u/s 80-IAC

A deduction of 100% of profits and gains by an eligible startup from eligible business is allowed for any 3 consecutive Assessment years out of 10 years beginning from the year in which the eligible startup is incorporated.

4. What is Eligible Startup?

As per Section 80-IAC, eligible startup means the following

1. The startup should be incorporated as either Private Limited Company or Limited Liability Partnership Firm. Section 80-IAC does not include partnership firm in its definition.
2. The startup (Private limited/LLP) should be incorporated during the period 01st April 2016 to 31st March 2024.
3. The turnover should be less than or equal to Rs 100 crores in the financial year for which the deduction is claimed.
4. The startup should hold certificate of eligible business from DPIIT.

5. What is Eligible Business?

The business of eligible startup should be as follows.

1. Innovation, development or improvement of products or processes or services
2. Scalable business with a potential of employment generation or wealth creation.

6. Conditions to be fulfilled to register under 80-IAC

Section 80-IAC benefits are available for the eligible startups which fulfils the following conditions.

• The startup should not be formed by the splitting up or reconstruction of already existing business.
• The startup should not be formed by the transfer of plant or machinery to any new business which was used previously for any purpose.

Example: Radha Krishna private limited is incorporated on 24 th November 2020 and it is engaged in eligible business i.e, Sale of innovated products. It was recognized as startup under DPIIT and got the 80IAC exemption w.e.f FY 2020-21 itself. Now the profits of Radha Krishna private limited is as follows

As the profit of Radha Krishna private limited is high during FY 2025-26, 2026-27 and FY 2027-28, it is recommended to opt for Section 80-IAC deduction during the above 3 years