In the early stages of running a business, every rupee counts. For startups, the pressure is real — you’re balancing growth, team building, product development, and somehow trying to make a profit. So if there’s a way to legally save on taxes, it’s worth understanding properly. That’s where the startup tax holiday under Section 80-IAC of the Income Tax Act comes in.
This blog, part of the M2K Startup Series, breaks down how the benefit works, what startups need to qualify, and where founders need to be careful. If you’re running a startup and thinking about claiming this deduction, this is what you need to know — without the jargon.
Tax Holiday & conditions specified
Here’s the short version: if your startup qualifies, you can skip income tax on profits for three financial years. Not forever — just for three years, and you get to pick which three, as long as they fall within the first ten years of your startup’s existence.
But before you jump in, pause. The deduction isn’t automatic. You need to check three things:
- Are you an eligible startup under the official definition?
- Is your business doing work that counts as eligible business?
- Have you met all other conditions mentioned in the law?
If you can say yes to all of those, you’re on track. Let’s go one step at a time.
Eligible Startup
First, let’s look at who actually qualifies.
You need to be either a Private Limited Company or an LLP. That’s non-negotiable. If you’re running a regular partnership firm, this benefit is not for you.
Next, your startup must have been registered between 1st April 2016 and 31st March 2022. That’s a tight window — if you started before or after that, this deduction isn’t available.
Another key rule: your turnover should be under ₹100 crore in the year you want to claim the deduction.
And finally, you’ll need a certificate from the Inter-Ministerial Board of Certification (IMB). You have to file an application using Form-1, and only after the IMB confirms that your business qualifies can you move ahead.
Eligible Business
The next question is: what kind of work does your business need to do?
The law says your startup must be involved in one of these:
- Improving a product, service, or process
- Doing something that counts as innovation
- Running a scalable model that can create jobs or wealth
This part is important. Not every startup building a website or selling products online automatically qualifies. There has to be something new or significantly better about what you’re offering.
Other Conditions
Now for the technical stuff. Even if you tick all the boxes above, your startup still needs to meet two more conditions about how it was set up.
Plant & Machinery
If your startup has just taken over equipment from an old business, that could disqualify you.
You can’t claim the deduction if your business is formed by transferring plant and machinery that was already used for something else — unless:
- The machinery was previously used outside India and has never been used in India, and
- You’ve not claimed any depreciation on it before
Or, even if you did reuse some old machinery, it’s allowed if it makes up 20% or less of the total machinery used in the business.
In short — your setup should mostly be new.
Reconstruction of business
This one’s simple: if your startup is just a restructured version of a business that already existed, you’re not eligible.
However, there’s one exception. If your business was revived after a flood, riot, or disaster, and that’s why it looks like a reconstruction, you can still qualify for the tax benefit.
You’ve come this far — now let’s talk about how the deduction is actually calculated and what forms need to be filed.
Computation of deduction
The deduction is meant only for profits earned from the eligible business. You have to calculate tax assuming that’s your only source of income — you can’t mix in interest income or other earnings.
Tax Audit
You’ll need a statutory audit of your books. Along with your income tax return, you must file Form 10CCB, which is the specific audit form for this benefit.
If you miss that, the deduction won’t be allowed — no matter how eligible you are otherwise.
Deduction can’t be claimed twice
If you’ve claimed your profits under Section 80-IAC, you cannot take that same amount under any other tax benefit. The law is clear: one deduction per income.
Illustration of deduction under normal vs concessional tax regime
This part shows how numbers change based on the tax regime you choose. There are two options: regular tax or the newer concessional tax regime under Section 115BAA.
Let’s look at both situations with the same example: your startup made ₹12 crore in profit.
Scenario 1: You don’t opt for Section 115BAA
In this case:
- You claim ₹12 crore under Section 80-IAC
- Your taxable income becomes zero
- You owe no tax under normal provisions
However, you still have to deal with Minimum Alternate Tax (MAT). Since your book profit is ₹12 crore, you’ll pay around ₹2.10 crore under MAT rules.
But this isn’t lost money — you can carry forward the MAT credit for up to 15 years and use it to reduce your future tax liability.
Scenario 2: You opt for Section 115BAA
This is the concessional tax regime.
Here’s the difference:
- You can’t claim the 80-IAC deduction under this route
- You pay tax on the full ₹12 crore
- The tax comes to about ₹3.02 crore
- But MAT doesn’t apply under this option
So, which one is better? It depends. If you’re profitable early and can claim 80-IAC fully, the regular route might save more. But if you want simplicity and fewer rules, 115BAA is a cleaner option — just without the tax holiday.
Tax rates applicable to companies & LLPs
Your final tax burden also depends on your company structure and your choice of regime. Here’s a quick comparison:
- Companies with turnover ≤ ₹400 crore
Regular tax: ~26% to ~29% depending on income
MAT: ~15.6% to ~17.4% - Companies with turnover > ₹400 crore
Regular tax: up to ~34.9%
MAT: ~17.4% - If you choose Section 115BAA:
Flat ~25.168%, but no MAT - If you go with Section 115BAB:
Flat ~17.16%, but also no 80-IAC benefit - LLPs are taxed at around 31.2% to 34.9%, with higher MAT too
And again — if you go with 115BAA or 115BAB, you cannot claim the startup tax holiday.
Final thoughts
This tax holiday isn’t just a nice-to-have. For startups trying to survive and scale in their first few years, it can make a serious difference. You could end up saving several lakhs — or even crores — that you can put back into your team, product, or operations.
But it’s not a shortcut. You have to meet every condition, submit the right forms, and be careful with how your business is structured. There’s no margin for error here — one missed rule and the benefit is gone.
If you’re eligible and profitable, don’t delay. Get your certificate from IMB, file your forms, and talk to a tax expert if you’re unsure. Claim what’s yours — properly.
Next up in the Startup Series:
We’ll be diving into the Taxability of Share Premium, especially what happens when you raise funding and issue shares above face value.
