Tax Exemption for Startup Under Section 80-IAC of the Income-tax Act,1961

Why Section 80-IAC was introduced?

To address India's gaps in innovation, research, and development and to strengthen the country in these key areas, the government introduced Section 80-IAC. By offering substantial tax benefits to startups and eligible businesses, the government aims to drive progress and growth, focusing on the following objectives:

• Promote entrepreneurship: Inspire the creation of new businesses and ideas.
• Stimulate economic growth: Support businesses with high potential for job creation and wealth generation.
• Attract investment: Make India a more attractive destination for venture capital and other investment forms.
• Reduce the financial burden on startups: Provide relief from taxes during their early stages, allowing them to reinvest in growth.

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Provisions Under Section 80-IAC in Respect of Specified Business

Section 80-IAC pencils the provisions for deductions available to eligible start-ups.

1. If an eligible start-up's gross total income includes profits and gains from its qualifying business, it is entitled to claim a deduction equal to 100% of those profits for any three consecutive assessment years. This deduction is subject to the conditions of this section.

2. The start-up may choose to claim this deduction for any three consecutive years out of the first five years since the date of its incorporation.

3. To qualify, the start-up must meet the following conditions:

• It must not be formed by splitting or reconstructing an existing business. However, this condition does not apply if the start-up is formed due to re-establishing or reviving a business under Section 33B.
• It must not have acquired previously used machinery or plant. If machinery or plant used outside India is imported, it may still qualify as "new," provided that (a) it was not previously used in India, (b) it was imported into India, and (c) no depreciation was claimed on it prior to its installation by the start-up. Additionally, if previously used machinery transferred to the new business does not exceed 20% of the total value of the machinery used in the business, this condition is considered satisfied.

4. Sub-sections (5) and (7) to (11) of Section 80-IA apply to these deductions.

For the purpose of this section:

• "Eligible business" refers to businesses focused on innovation, research, and development, or commercialization of new services, products, or processes operated by technology or intellectual property.
• "Eligible start-up" means a company or limited liability partnership (LLP) that:
• It was incorporated between April 1, 2016, and April 1, 2019.
• Has a total turnover not exceeding ₹25 crore in any previous year since April 1, 2016.
• Has a certificate of eligibility from the Inter-Ministerial Board of Certification as notified by the Central Government.
• "Limited liability partnership" is as defined under Section 2(1)(n) of the Limited Liability Partnership Act, 2008.

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Eligible Incomes and Exclusions under Section 80-IAC

Eligible Incomes:
Income earned or derived by the eligible investor, i.e., the domestic company, from investments made in eligible businesses is entitled to tax incentives under Section 80-IAC. This benefit is applicable only for investments made on or after April 1, 2019.

Exclusions from Eligible Incomes:
The following incomes do not qualify for the deduction:

• Dividends
• Interest
• Quantitative discounts
• Retirement benefits
• Capital gains
• Income from the sale, exchange, or transfer of any shares or securities

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What are the Benefits of Claiming the Deduction?

• The deduction amount equals 100% of the profits and gains derived from eligible businesses for three consecutive assessment years.
• In case the business closes before the end of the assessment year, you may qualify for a step-up or carry forward of losses.
• This deduction is available to all assessees, including individuals, Hindu Undivided Families (HUFs), companies, and trusts.
• The deduction can be applied to offset taxes on other income, such as salary, interest, or dividend income.
• Advance tax payments are not required for this deduction.

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How to Apply for the Exemptions U/S 80-IAC

To claim the deduction under Section 80-IAC, the eligible assessee must obtain a certificate from the Inter-Ministerial Board of Certification. Here are the steps to apply for the certificate:

Step 1: Log in to the Startup India portal. Then, follow the on-screen instructions to apply for the DPIIT recognition certificate through the Startup India registration process.

Step 2: Select the option for "claim tax exemption" and complete the form with the following details:

• Name of the startup
• Date of incorporation
• Address and business location
• Incorporation/registration number
• Nature of business (LLP or Private Limited Company)
• DIPP number
• Contact details (email ID, phone number, and PAN number of the entity)

Step 3: To claim deductions under Section 80-IAC, the startup must submit the following documents in PDF format:

• Limited Liability Partnership Deed (for LLPs)
• Memorandum of Association (for PLCs)
• Board Resolution (if applicable)
• CA-certified balance sheet and Profit and Loss statements
• Financial statements for the last three years or from the date of establishment
• Income Tax Returns for the last three years or from the date of establishment
• A link to a video pitch of the startup
• Pitch Deck in PDF format

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