TAX EXEMPTION- Section 80-IAC & Beyond — The Real Tax Relief Roadmap for Start-up Founders

In India’s booming start-up ecosystem, innovation and entrepreneurship are thriving like never before. However, as every founder knows, managing taxes and compliance can often feel as challenging as building the business itself.

Fortunately, the Indian government has introduced several tax incentives to encourage start-up growth — the most prominent among them being Section 80-IAC of the Income Tax Act. But 80-IAC is just the starting point. There are multiple other provisions founders can strategically use to reduce tax liability, extend financial runway, and fuel expansion.

Let’s explore Section 80-IAC in detail — and go beyond it to uncover the complete tax relief roadmap for Indian start-ups.

1. What is Section 80-IAC?

Section 80-IAC was introduced to promote innovation and entrepreneurship in India. It allows eligible start-ups to claim 100% income tax exemption on profits for any three consecutive years out of the first ten years since incorporation.

This tax holiday can significantly ease the financial pressure during the critical early years when funds are typically reinvested in growth, product development, and team building.

Eligibility Criteria under Section 80-IAC

-To claim this benefit, a start-up must:
– Be incorporated as a Private Limited Company or a Limited Liability Partnership (LLP).
– Be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).
– Have a turnover of less than ₹100 crore in any financial year since incorporation.
– Be engaged in innovation, development, or improvement of products, processes, or services, or a scalable business model with high potential for employment or wealth creation.

Once these conditions are satisfied, the start-up can apply for an Inter-Ministerial Board (IMB) certification, which is mandatory to avail the Section 80-IAC tax holiday.

2. Additional Tax Benefits for DPIIT-Recognized Start-ups

While Section 80-IAC is the flagship benefit, DPIIT recognition opens the door to other crucial tax reliefs as well.

(a) Angel Tax Exemption – Section 56(2)(viib)

Start-ups often raise funds by issuing shares to investors. However, if the issue price of shares exceeds their fair market value (FMV), the difference is considered income and taxed under Section 56(2)(viib) — commonly known as Angel Tax.

DPIIT-recognized start-ups are exempt from Angel Tax, provided:

– The start-up has filed the declaration with DPIIT.
– Shares are issued at a fair valuation.
– The investor and company meet prescribed conditions under the Startup India framework.
This exemption helps early-stage companies raise capital smoothly without worrying about unnecessary tax liabilities.

(b) Carry Forward of Losses – Section 79

Ordinarily, when a company’s shareholding changes by more than 49%, it cannot carry forward accumulated losses.
However, under Section 79, eligible start-ups are given a relaxation — they can carry forward and set off losses even if shareholding changes, as long as all original shareholders continue to hold at least 51% voting power or continue to be part of the company.
This is particularly useful for start-ups that undergo multiple funding rounds or restructuring while still incurring losses in their formative years.

(c) Capital Gains Exemptions

Start-ups can also claim relief under other sections:

– Section 54GB: Capital gains from sale of a residential property are exempt if invested in start-up shares.
– Section 54EE: Exemption on long-term capital gains if invested in units of notified start-up funds.
These provisions encourage reinvestment of capital into the start-up ecosystem.

3. How to Apply for DPIIT Recognition and IMB Certification

Step 1: DPIIT Registration Visit the Startup India portal (www.startupindia.gov.in
) and register your business by providing basic details such as incorporation certificate, PAN, and a short write-up on your innovative business model.
Once verified, your start-up receives DPIIT recognition, making it eligible for various government schemes and tax benefits.

Step 2: IMB Certification for Section 80-IAC

After DPIIT recognition, the next step is to apply for Inter-Ministerial Board (IMB) Certification to avail the 80-IAC exemption.
Documents typically required include:
– Certificate of Incorporation
– PAN details
– Audited financial statements
– Business description and innovation proof

The IMB evaluates whether your start-up meets the innovation criteria before granting the certificate.

4. Compliance Requirements for Maintaining Eligibility

Receiving recognition or exemption is only the first step — maintaining compliance is equally critical. Founders must:

– File annual income tax returns on time.
– Submit necessary declarations to DPIIT.
– Maintain accurate books of accounts and financial statements.
– Ensure no misuse of funds or deviation from declared business activity.
Non-compliance or incorrect disclosures can lead to revocation of recognition or cancellation of tax benefits.

5. Why Professional Guidance Matters

Navigating start-up taxation requires precision and awareness of frequent regulatory updates. A Chartered Accountant or tax advisor experienced in start-up compliance can help you:

– Choose the right 3-year block for maximum benefit under Section 80-IAC.
– Prepare and file documents correctly for DPIIT and IMB.
– Avoid errors in share valuation for Angel Tax exemption.
– Plan long-term tax strategies to optimize funding rounds and losses.
A small investment in professional guidance can save lakhs in potential taxes and penalties.