Income Tax Benefits and Exemptions for Startups in India

India has emerged as one of the world’s fastest-growing startup ecosystems, with the government actively promoting innovation and entrepreneurship through the Startup India initiative. Recognizing that newly established businesses face funding challenges and high compliance costs, the Income-tax Act, 1961 provides several tax incentives and exemptions to eligible startups.

These benefits are primarily aimed at reducing the initial tax burden, encouraging capital infusion, and supporting innovation-driven enterprises. Key provisions include a three-year tax holiday under Section 80-IAC, exemption from Angel Tax under Section 56(2)(viib), capital gains exemptions for investors, and relaxed norms for carrying forward losses. Additionally, startups structured as companies can opt for concessional corporate tax rates.

By offering these targeted incentives, the government seeks to create a favorable tax environment that nurtures early-stage ventures, improves their survival rate, and boosts their contribution to employment and economic growth.

In India, “eligible startups” (as per Income-tax Act + DPIIT recognition) enjoy a few specific income tax exemptions and benefits, mainly aimed at reducing the tax burden in the early growth years.

Here’s a clear breakdown:

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🔹 1. Tax Holiday under Section 80-IAC

• Who can claim?
  Startups recognized by DPIIT (Department for Promotion of Industry and Internal Trade).
• Benefit:
  100% exemption of profits for 3 consecutive years out of 10 years from incorporation.
• Conditions:
  • Incorporated between 1 April 2016 and 31 March 2025.
  • Turnover ≤ ₹100 crore in any year.
  • Must be engaged in innovation, improvement of products, processes or services, or scalable business model with potential for employment generation or wealth creation.

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🔹 2. Exemption on Long-Term Capital Gains (Section 54EE / Section 54GB)

• Section 54EE (till FY 2019-20, not extended):
  Earlier, exemption was allowed on long-term capital gains invested in a fund notified by Govt. for startups (now discontinued).
• Section 54GB (still available):
  Capital gains from sale of a residential property are exempt if invested in equity shares of an eligible startup, provided startup uses it to purchase new plant & machinery.

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🔹 3. Exemption from “Angel Tax” (Section 56(2)(viib))

• Normally, if a closely held company issues shares at a price higher than Fair Market Value, the excess is taxed as “Income from Other Sources”.
• For DPIIT-recognized startups, this provision does not apply (i.e., investments above FMV from angel investors, VCs, HNIs are exempt).

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🔹 4. Carry Forward & Set-Off of Losses (Section 79 Relaxation)

• Normally, closely held companies can carry forward losses only if 51% of shareholding remains the same.
• For eligible startups:
  They can carry forward losses even if shareholding changes, provided all original shareholders remain who held shares in the year of loss.

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🔹 5. Concessional Corporate Tax (Optional)

• Not startup-specific, but startups set up as companies can opt:
  • 22% tax rate (Sec. 115BAA).
  • 15% tax rate (Sec. 115BAB) if new manufacturing company incorporated after 1 Oct 2019 and begins production before 31 Mar 2024.

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✅ In summary, the main income tax exemptions for startups are:

1. 3-year profit-linked tax holiday (Sec. 80-IAC).
2. Exemption from Angel Tax (Sec. 56(2)(viib)).
3. Capital gains exemptions (Sec. 54GB, earlier 54EE).
4. Relaxed rules for carry forward of losses.
5. Option of concessional corporate tax.

Step-by-Step Process for a startup in India to actually get the Section 80-IAC tax holiday approval from the Inter-Ministerial Board (IMB):

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🔹 1. Get DPIIT Recognition First

Before applying for 80-IAC tax holiday, your entity must be a DPIIT-recognized startup.

• Apply via the Startup India portal (www.startupindia.gov.in).
• You’ll need basic details: incorporation certificate (Company/LLP/Partnership), PAN, directors/partners details, nature of business, innovation description.
• After approval, you’ll receive a Startup Recognition Certificate from DPIIT.

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🔹 2. Apply for Tax Holiday (IMB Approval)

Once DPIIT recognition is received, you can apply for tax holiday u/s 80-IAC on the same Startup India portal.

Documents Required:

1. Startup Recognition Certificate (DPIIT).
2. MoA / Partnership Deed / LLP Agreement (depending on entity).
3. Board Resolution / Consent of Partners to apply.
4. Income tax returns (if filed already) + financial statements since incorporation.
5. Pitch Deck / Business Plan showing:
   • Innovative product/service/process.
   • Scalability & potential for wealth/employment generation.
6. Nature of Innovation Declaration – self-certification explaining how your startup is innovative/improves processes or services.

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🔹 3. IMB Evaluation

• Application is forwarded to the Inter-Ministerial Board of Certification (IMB) consisting of representatives from DPIIT, DBT, DST, and MeitY.
• They evaluate whether your startup is truly innovation-driven and not just a routine business.
• If satisfied → approval granted.

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🔹 4. Post-Approval

• Once IMB issues approval, your startup can claim 100% tax exemption on profits for any 3 consecutive years out of first 10 years.
• Claim must be made while filing ITR, along with attaching approval certificate.

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⚠️ Important Notes:

• Not all DPIIT startups get this automatically — only those with IMB approval.
• Routine businesses like trading, services without innovation, or re-packaging are not eligible.
• IMB approval process can take time and scrutiny is strict — very few startups actually get it.

Quick-reference table of all major income tax benefits available for startups in India, with relevant sections and conditions:

📌 Income Tax Benefits for Startups in India