Section 80-IACTax Holiday for Eligible Startups
Section 80-IAC gives a DPIIT-recognised startup a full deduction of its profits for three consecutive years chosen out of its first ten, subject to conditions and a separate approval.
In short
- It is a deduction of one hundred percent of profits, so it eliminates tax on eligible business income for the years claimed rather than reducing the rate.
- Three consecutive assessment years, chosen by the startup out of its first ten from incorporation. The choice matters, because early-stage losses waste the benefit.
- DPIIT recognition alone is not enough. A separate application to the Inter-Ministerial Board is required specifically for 80-IAC.
- The entity must not be formed by splitting up or reconstructing an existing business, or by transferring used plant and machinery beyond the permitted proportion.
- MAT or AMT can still apply, so a startup claiming the holiday is often not at zero tax outflow.
- Under the Income-tax Act, 2025 this becomes Section 140. Its enacted heading reads 'Special provision in respect of specified business' and does not mention start-ups at all, which is worth knowing before concluding from the heading that the deduction has gone.
Who it applies to
- Companies and Limited Liability Partnerships, but not proprietorships or ordinary partnerships
- Entities holding DPIIT recognition as a startup
- Entities incorporated within the window prescribed by the section and within the turnover ceiling
- Businesses involving innovation, development, or improvement of products, processes, or services, or a scalable model with high potential for employment or wealth creation
How it works
Section 80-IAC is the substantive tax benefit behind the Startup India programme, and it is considerably narrower than the publicity around it suggests. It offers a full deduction of profits from the eligible business for three consecutive assessment years, which the startup selects from its first ten years after incorporation. Used well, it means a startup pays no income tax on its eligible profits in the years it chooses.
The choice of years is the strategic decision, and getting it wrong is the most common way the benefit is squandered. Most startups lose money early, and a deduction of one hundred percent of profits is worth exactly nothing in a year with no profits. Claiming the holiday in years one to three, purely because they come first, frequently wastes it entirely. The section deliberately gives a ten-year window so the three years can be aligned with the period when the business actually turns profitable.
Eligibility has two layers that are often conflated. DPIIT recognition makes an entity a startup for the purposes of the programme generally, and it is the gateway to several benefits including the angel tax relief under Section 56(2)(viib). It does not by itself confer the 80-IAC deduction. That requires a further, separate application to the Inter-Ministerial Board, which assesses the innovation criterion specifically, and approval rates there have historically been low relative to DPIIT recognition. A startup that assumes recognition equals tax holiday finds out late.
The anti-abuse conditions are strict and worth checking before restructuring anything. The entity must not be formed by splitting up or reconstructing a business already in existence, and it must not be formed by transferring plant or machinery previously used for any purpose beyond a limited proportion of total value. Founders moving an existing consulting practice into a new company to claim the holiday are precisely what these clauses are aimed at. There is a relaxation for imported second-hand machinery never previously used in India.
One practical caveat that surprises people: the deduction is from total income under Chapter VI-A, but Minimum Alternate Tax for companies and Alternate Minimum Tax for LLPs are computed differently and can still apply. A startup enjoying a full deduction may therefore still write a cheque. The credit for that tax can be carried forward and used later, but the cash flow impact in the holiday years is real.
Also searched as: startup tax holiday, 80IAC, 80 IAC of income tax act, startup tax exemption, Section 80-IAC, Section 140 of the Income-tax Act, 2025.
Frequently asked questions
Does DPIIT recognition automatically give me the 80-IAC tax holiday?
No. DPIIT recognition establishes startup status for the programme generally, but the 80-IAC deduction requires a separate application to the Inter-Ministerial Board, which assesses the innovation criterion on its own terms. Many DPIIT-recognised startups are never granted 80-IAC approval.
Which three years should a startup choose for the deduction?
The years in which the business is actually profitable. The deduction removes tax on profits, so claiming it during loss-making early years wastes it entirely. The ten-year window exists precisely so the three years can be aligned with profitability, and the choice is worth modelling rather than defaulting to the earliest years.
Can an LLP claim Section 80-IAC?
Yes. The section covers both companies and Limited Liability Partnerships, provided all other conditions are met. Proprietorships and ordinary partnership firms are outside it.
Will a startup claiming 80-IAC pay any tax at all?
Possibly. Minimum Alternate Tax for companies and Alternate Minimum Tax for LLPs are computed on a different base and can apply even where the full deduction is claimed. The tax paid generates a credit that can be carried forward and set off in later years, but the cash outflow in the holiday years is real.
Worked detail on this section
Current rates, limits, and step-by-step process live in these guides, which are kept updated as the law moves.
Forms involved
Primary sources
Disclaimer
This page explains what a statutory provision does in general terms. It is not a substitute for the bare act, and it is not professional tax or legal advice. Rates, thresholds, and limits change with each Finance Act, and applicability turns on facts specific to you. Confirm anything that affects a real filing with a qualified Chartered Accountant.