Section 80-IAC of the Income Tax Act: A Brief Explanation
CA Gagan Gupta
Founder & Principal, Kishnani & Associates
CA Gagan Gupta is a seasoned Chartered Accountant with extensive expertise in taxation, audit, financial consulting, and business advisory. A fellow member of the ICAI since 2021, he has been practicing since 2016, providing strategic financial solutions to businesses, startups, and individuals. Under his leadership, Kishnani & Associates delivers precise and ethical financial services, ensuring seamless regulatory compliance and sustainable growth for clients.
The Indian government has introduced various tax incentives to promote entrepreneurship and innovation in the country. One such provision is Section 80-IAC of the Income Tax Act, 1961, which provides tax benefits to eligible start-ups. This section was introduced to encourage the growth of start-ups by offering them a tax exemption for a limited period. In this article, we will explore the key aspects of Section 80-IAC, including its eligibility criteria, benefits, and the process of availing oneself of the exemption.
What is Section 80-IAC?
Section 80-IAC was introduced through the Finance Act, 2016, as part of the Indian government’s initiative to support start-ups under the Start-up India program. It provides a tax deduction to eligible start-ups for three consecutive financial years within the first ten years of incorporation. This exemption helps start-ups reinvest their earnings, expand their business, and sustain their growth without the burden of income tax during the initial years.
Eligibility Criteria for Claiming Section 80-IAC Deduction
To avail of the tax benefits under Section 80-IAC, a start-up must meet the following criteria:
Nature of Business
The start-up should be engaged in innovation, development, and improvement of products, processes, or services, or scalable business models with a high potential for employment generation or wealth creation.
Legal Structure
The business must be registered as either:
- A private limited company under the Companies Act, 2013, or
- A limited liability partnership (LLP) under the LLP Act, 2008.
Incorporation Period
The entity must be incorporated between April 1, 2016, and March 31, 2024, to qualify for this benefit.
Recognition by DPIIT
The start-up must be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT). This recognition ensures that only genuine start-ups engaged in innovation and development receive the benefits.
Turnover Limit
The start-up’s annual turnover must not exceed ₹100 crore in any of the previous financial years for which the deduction is claimed.
New Business Requirement
The start-up should be a new business and not be formed by splitting, restructuring, or reconstructing an existing business.
Tax Benefits under Section 80-IAC
Eligible start-ups can claim a 100% tax exemption on profits for any three consecutive years within the first ten years of their incorporation. This means that if a start-up makes a profit, it does not have to pay income tax for the selected three years, allowing it to reinvest those earnings for further growth.
This benefit significantly reduces the financial burden on start-ups and encourages more entrepreneurs to establish businesses without worrying about high tax liabilities in the early years.
Procedure to Avail Section 80-IAC Benefits
Step 1: DPIIT Recognition
The start-up must apply for recognition through the DPIIT portal. The application requires details about the business, its innovation, and how it meets the eligibility criteria.
Step 2: Application to the CBDT
After obtaining DPIIT recognition, the start-up must apply to the Central Board of Direct Taxes (CBDT) for approval to claim tax exemption under Section 80-IAC.
Step 3: Submitting Necessary Documents
The application should be accompanied by essential documents, including:
- Certificate of incorporation
- Business plan and details of innovation
- Financial statements and tax filings (if applicable)
Step 4: Approval and Claiming Deduction
Once approved by CBDT, the start-up can claim the 100% deduction on its profits while filing its income tax returns (ITR) for the selected three years.
Important Points to Note:
- The exemption is available for only three years, which must be consecutive. Start-ups must plan their exemption period wisely.
- The start-up must maintain proper documentation to substantiate its claims in case of scrutiny by tax authorities.
- If the DPIIT revokes a start-up’s recognition, the start-up becomes ineligible for benefits under Section 80-IAC.
- If the start-up’s turnover exceeds ₹100 crore in any financial year, it will lose eligibility for that year.
Conclusion
Section 80-IAC is a crucial tax benefit designed to promote start-ups and encourage innovation in India. By offering a 100% tax deduction on profits for three years, it provides much-needed financial relief to emerging businesses, allowing them to focus on growth and sustainability. However, start-ups must meet all eligibility criteria and complete the necessary formalities to claim this benefit.
Entrepreneurs looking to take advantage of this provision should consult a tax expert or chartered accountant to navigate the application process and maximize the benefits available under Section 80-IAC.
