Tax Exemption for Startups in India – Complete Guide to 100% Savings

If your startup is a private limited company or LLP, incorporated after 01/04/2016, with annual turnover below ₹100 crore and DPIIT recognition in hand, you can pay zero income tax on profits for any 3 consecutive years out of your first 10 years of operation. That is a 100% tax holiday under Section 80-IAC of the Income Tax Act, and for a startup turning profitable at ₹4 to 5 crore in taxable income, it translates directly to ₹1.2 to 1.5 crore saved per year. The process has two steps most founders conflate into one: get DPIIT recognition first, then separately file Form 1 with the Income Tax Department to obtain the Inter-Ministerial Board (IMB) certificate. Without that second filing, the holiday does not activate, no matter how long you have held the DPIIT certificate. This article walks through every tax exemption available, every eligibility condition, every filing step, and what changed under the Income Tax Act 2025 from 01/04/2026.

How Indian Startups Can Claim 100% Tax Exemption

In 2026, several tax exemptions are available to startups in India, including those under Section 80-IAC of the Income Tax Act and the Startup India program. These provisions offer startups the opportunity to receive substantial tax benefits, enabling them to reinvest their savings into business development, technology, and talent acquisition. In this article, we explore what tax exemptions are available, how they benefit startups, and why they are so essential for the startup ecosystem in India.

• These exemptions are part of the Startup India Action Plan, a government initiative designed to reduce financial burdens on early-stage businesses and foster entrepreneurship, investment, and job creation across India.
• DPIIT recognition is the entry point for every benefit. Without it, nothing else applies. Apply via NSWS (nsws.gov.in), not the Startup India portal. It is free, and no agent is authorised to do it for you.
• Section 80-IAC gives a 100% income tax holiday for any 3 consecutive years within the first 10 years of incorporation. Only private limited companies and LLPs qualify.
• DPIIT recognition alone is not enough. You must separately file Form 1 with the Income Tax Department to obtain the IMB certificate (also called the “eligible business” certificate). This is the document that actually activates the 80-IAC holiday. Most startups miss this step and lose the benefit silently.
• Angel tax is gone. Section 56(2)(viib) was abolished from 01/04/2025. All new fundraising rounds are free of this issue. Prior year notices still need to be defended.
• Section 54GB lets individual and HUF investors claim capital gains exemption when they invest sale proceeds from long-term assets, including residential property, into eligible startup equity.
• Section 54EE allows reinvestment of long-term capital gains into government-notified startup funds, up to ₹50 lakh, with a 3-year lock-in.
• Section 79 protects your carried-forward losses through funding rounds. As long as original shareholders retain any stake, losses survive dilution. Plan this before each round closes, not after.
• DeepTech startups get extended windows: 20 years of startup life and ₹300 crore turnover threshold for DPIIT recognition.
• Manufacturing startups must choose between Section 80-IAC (100% exemption, 3 years) and Section 115BAB (15% rate, permanent). Model both before your first profitable year. The election is largely irrevocable.

What are the tax exemptions available for startups in India?

The Indian government provides startup tax exemptions through the Startup India Action Plan and specific provisions within the Income Tax Act 1961 (now the Income Tax Act 2025 from 01/04/2026). The intent is straightforward: reduce the tax burden in the early years so founders can put cash back into product, hiring, and growth rather than government payments.

The five provisions every startup should know are:

• Section 80-IAC: 100% income tax holiday on profits for any 3 consecutive years out of the first 10 years of operation. The single largest cash saving available to an eligible startup.
• Section 54GB: Capital gains exemption for individual and HUF investors who reinvest long-term asset sale proceeds into eligible startup equity.
• Section 54EE: LTCG exemption on investments of up to ₹50 lakh into Central Government-notified startup funds, with a 3-year lock-in.
• Section 56(2)(viib): Angel tax, abolished from 01/04/2025. Equity issued above fair market value is no longer taxable as income in the startup’s hands for rounds from FY 2024-25 onwards.
• Section 79: Relaxed carry-forward of losses for eligible startups through dilutive funding rounds, protecting accumulated losses from being wiped out when new investors come in.

Beyond tax, DPIIT recognition also unlocks angel tax exemption history, labour law self-certification, patent fee rebates, and credit guarantee access, all covered in detail below.

Eligibility criteria for startup tax exemptions

To qualify for startup tax exemptions in India, businesses must meet certain criteria outlined under the Startup India program and relevant tax provisions like Section 80-IAC of the Income Tax Act. These exemptions are designed to support early-stage companies by reducing their tax liabilities, thereby helping them focus on growth, innovation, and development.

Who is eligible for startup tax exemption in India?

The Indian government provides startup tax exemptions under the Startup India initiative. To avail of these exemptions, businesses must fulfil the following eligibility criteria:

1. DPIIT recognition

• DPIIT (Department for Promotion of Industry and Internal Trade) recognition is a mandatory requirement for startups to claim tax exemptions under the Startup India program.
• The startup must apply for DPIIT recognition, which is a certification that validates the business as an eligible startup.
• DPIIT recognition is crucial because it allows startups to access various benefits, including tax exemptions, funding opportunities, and other government initiatives aimed at supporting business growth.

2. Business type and nature

• Startups must be engaged in innovation, development, or improvement of products or services that provide a scalable business model.
• The nature of the business should not include infrastructural activities, real estate, or other excluded sectors.
• The business should focus on technology, manufacturing, e-commerce, agriculture, and other sectors that contribute to economic growth.

3. Age of the business

• To be recognised as a startup, the business should not be more than 10 years old from its date of incorporation or registration.
• This age limit ensures that only newly established companies can avail of the tax exemptions aimed at providing support during their early growth phase.

4. Annual turnover

• Startups must have an annual turnover that does not exceed ₹100 crore in any financial year to be eligible for tax exemptions under Section 80-IAC.
• For DPIIT recognition purposes (separate from Section 80-IAC), the general turnover threshold is ₹200 crore in any previous financial year.
• This condition ensures that exemption benefits are provided to smaller, high-potential companies rather than well-established businesses.

5. Special eligibility for DeepTech startups

The government has created an extended eligibility window specifically for DeepTech startups, recognising that deep technology businesses take longer to commercialise. Under the current DPIIT notification, DeepTech startups benefit from:

• A higher turnover threshold of ₹300 crore (vs ₹200 crore for general startups) for DPIIT recognition purposes.
• An extended startup life of 20 years from the date of incorporation (vs 10 years for general startups).

DeepTech covers sectors such as artificial intelligence, machine learning, quantum computing, advanced materials, biotech, and space technology. If your startup operates in any of these domains, the extended thresholds mean you remain eligible for recognition and associated benefits for a significantly longer period. The Section 80-IAC eligibility criteria (private limited or LLP, incorporated after 01/04/2016, turnover under ₹100 crore) continue to apply separately for the income tax holiday claim.

6. Excluded sectors and entity types: who does not qualify?

Not every business registered in India qualifies for startup recognition, regardless of age or turnover. DPIIT applies a business nature test at the point of recognition, and the following categories are routinely excluded:

Excluded business activities

• Real estate development and construction (not including proptech platforms)
• Non-banking financial companies (NBFC) and lending businesses
• Trading businesses (import-export, wholesale, retail distribution without value-add)
• Agricultural commodity processing without technology differentiation
• Businesses in tobacco, liquor, and pan masala
• Gambling, lottery, and gaming businesses of a speculative nature

Excluded entity types for Section 80-IAC (even if DPIIT-recognised)

• Partnership firms (can obtain DPIIT recognition but cannot claim the 80-IAC tax holiday)
• Co-operative societies (same position)
• Public limited companies (not included in the private limited and LLP eligibility)

Excluded on structural grounds

• Any entity formed by splitting, reconstruction, or demerger of an existing business
• Entities where the same business was previously operated under a different legal form and is now re-registered to claim recognition

A startup that has evolved its business model since recognition to include excluded activities (lending, real estate brokerage, trading) should review whether its DPIIT recognition remains valid. A lapsed or revoked recognition certificate eliminates all downstream benefits retroactively for the affected assessment years.

Quick eligibility checklist

Criteria	General startup	DeepTech startup
Entity type	Pvt Ltd or LLP only for 80-IAC	Same
Age from incorporation	Up to 10 years	Up to 20 years
Turnover (DPIIT recognition)	Up to ₹200 crore	Up to ₹300 crore
Turnover (Section 80-IAC)	Up to ₹100 crore	Up to ₹100 crore
Formed by splitting existing business	Not eligible	Not eligible
Sector	Innovation / scalable / employment	Same
DPIIT recognition	Mandatory	Mandatory
IMB certificate	Mandatory for 80-IAC	Mandatory for 80-IAC

Key criteria for Section 80-IAC eligibility

Section 80-IAC of the Income Tax Act offers significant tax exemptions to eligible startups, allowing them to enjoy a tax holiday for the first three years. To qualify for this exemption, startups must meet the following specific criteria:

1. DPIIT recognition for Section 80-IAC

As mentioned earlier, obtaining DPIIT recognition is a prerequisite for claiming benefits under Section 80-IAC. Without this recognition, a startup cannot claim the tax holiday or other tax exemptions available under the provision.

2. Nature of the business

• The startup must be engaged in innovative and scalable businesses that provide solutions to existing problems or gaps in the market.
• The business should aim to scale rapidly and contribute to the Indian economy, providing job opportunities, technological advancements, or solutions to societal problems.

3. Age of the business

For Section 80-IAC benefits, startups should be less than 10 years old at the time of claiming the exemption. This ensures that the relief is targeted at young, high-growth businesses.

4. Ownership structure

• The startup must be a private limited company or a limited liability partnership (LLP).
• The startup must not be formed by splitting up or reconstruction of an existing business.

5. Indian and foreign-funded startups

• Section 80-IAC applies to both Indian-funded and foreign-funded startups. Startups can be fully funded by Indian investors or have foreign backing through venture capital, angel investors, or other sources.
• As long as the startup meets the core criteria, such as DPIIT recognition and business nature, both Indian and foreign-funded businesses are eligible for the tax exemptions under this section.

How to get DPIIT recognition for your startup

DPIIT recognition is the gateway to every tax exemption and benefit under the Startup India scheme. Without it, Section 80-IAC cannot be claimed, angel tax exemptions do not apply, and other government incentives remain inaccessible. The application is filed through the National Single Window System (NSWS) at nsws.gov.in, not directly on the Startup India portal as was the case earlier.

The Ministry of Commerce and Industry does not charge any fee for the DPIIT Certificate of Recognition. No agency or franchise has been authorised to file on a startup’s behalf, and the application must be submitted using the startup’s own credentials, mobile number, and email address.

Documents required for DPIIT recognition

Before starting the application, keep these ready:

• Certificate of incorporation (for private limited company) or registration certificate (for LLP or partnership firm)
• PAN of the entity
• Details of authorised representative (director, designated partner, or authorised signatory)
• Brief description of the business, its products or services, and the innovation or improvement it brings
• Website URL or pitch deck (if available)
• Any patent, trademark, or IP filing evidence (if applicable, to strengthen the innovation claim)

Step-by-step process to get DPIIT recognition via NSWS

Step 1: Create an account on NSWS Visit nsws.gov.in and register with the entity’s PAN, email, and mobile number. Select the appropriate entity type (company, LLP, or partnership firm).

Step 2: Add the startup registration form Once logged in, search for and add the form titled “Registration as a Startup” from the central government approvals section. This is the DPIIT recognition application.

Step 3: Fill in entity details Enter incorporation date, registered address, entity type, sector, and details of all directors or designated partners. The system pulls some data from the MCA database automatically if the entity is already registered.

Step 4: Describe the innovation This is the most critical section of the form. DPIIT evaluates whether the business is working towards innovation, development, or improvement of products, processes, or services, or whether it operates a scalable business model with high potential for employment generation or wealth creation. Write a clear, specific description of what the product or service does, what problem it solves, and why it is novel or scalable. Vague descriptions like “technology-based solutions” are routinely returned for clarification.

Step 5: Upload supporting documents Upload the incorporation certificate, PAN, and any supporting evidence for the innovation claim. File size and format requirements are specified on the portal.

Step 6: Submit and track Submit the application. DPIIT processes applications and issues the certificate digitally. Approved entities receive the DPIIT Certificate of Recognition, which is the document required to proceed with Section 80-IAC and angel tax exemption applications.

Step 7: Apply for tax exemptions post-recognition After receiving the DPIIT certificate, the startup can apply for:

• 80-IAC income tax holiday: Through the income tax portal.
• Angel tax exemption under Section 56: Through the Startup India portal (now largely moot post-abolition of angel tax from 01/04/2025, but relevant for any assessment years prior to that date).

Common reasons for DPIIT recognition rejection

• Innovation description is too generic or mirrors the standard business description without explaining what is new.
• Entity is older than 10 years from the date of incorporation at the time of application.
• Business falls in an excluded category (real estate development, lending, trading, etc.).
• Entity was formed by splitting or reconstructing an existing business.
• Documents uploaded are incomplete or in incorrect format.

Eligibility summary table for DPIIT recognition

Parameter	General startups	DeepTech startups
Maximum age from incorporation	10 years	20 years
Turnover threshold (any previous FY)	₹200 crore	₹300 crore
Eligible entity types	Pvt Ltd, LLP, Partnership, Co-operative Society	Same
Business focus	Innovation / scalability / employment / wealth creation	Same
Application portal	NSWS (nsws.gov.in)	Same
Fee	Nil	Nil

Types of tax exemptions for startups

India offers a range of tax exemptions for startups, designed to ease the financial burden on new businesses, foster innovation, and stimulate economic growth. These exemptions are especially beneficial during the early years of operation, when cash flow is typically tight and businesses face significant expenses. Among the most important tax exemptions for startups are Section 80-IAC, Section 54GB, Section 54EE, and the recently abolished angel tax provisions.

Section 80-IAC: a major tax exemption for startups

Section 80-IAC of the Income Tax Act offers one of the most significant tax exemptions for eligible startups in India. It provides a tax holiday for startups, offering a reduction or complete exemption of income tax for the first three years of operation. This exemption is available to DPIIT-recognised startups that meet specific criteria.

Key benefits:

• Tax exemption on profits: Eligible startups are exempt from paying income tax on their profits during the first three years of operation. This is an essential benefit for startups that need to reinvest earnings to scale their operations.
• Encourages growth and expansion: By offering a tax holiday, Section 80-IAC allows startups to focus on growing their business, acquiring customers, and expanding their product or service offerings without worrying about tax obligations during the critical early years.
• Eligibility: To qualify, a startup must be recognised by the DPIIT and meet specific criteria, including being less than 10 years old and having an annual turnover of less than ₹100 crore. Only private limited companies and LLPs are eligible for the Section 80-IAC holiday; recognised partnership firms and co-operative societies do not qualify for this specific provision.

Section 54GB: capital gains exemption for startups

Section 54GB of the Income Tax Act offers capital gains exemption to individuals and Hindu Undivided Families (HUFs) who invest their capital gains in equity shares of eligible startups. This section is designed to incentivise individuals to invest in startups by providing tax relief on capital gains.

How Section 54GB helps startups:

• Capital gains exemption: If an individual or HUF sells a long-term asset and reinvests the capital gains in eligible startup equity, the capital gains tax is exempted. This is beneficial for startups, as it attracts investment from individual investors.
• Encourages investment in equity: Startups can raise funds through equity investment without the fear of capital gains tax burdens on investors, thereby making it an attractive option for raising capital.
• Conditions for eligibility: The startup receiving the investment must be registered with DPIIT and meet certain criteria, such as being less than 10 years old and having an annual turnover of less than ₹100 crore. The investor must subscribe to at least 50% equity shares of the startup, and these shares must not be transferred within 5 years. The startup must also use the invested amount to purchase assets and not transfer those assets within 5 years from the date of purchase.

Section 54EE: exemption on long-term capital gains invested in notified funds

Section 54EE is a lesser-known but meaningful provision inserted into the Income Tax Act specifically for the startup ecosystem. It allows any taxpayer (individuals, HUFs, and other eligible persons) to claim exemption on long-term capital gains if the gain or a part of it is invested in a fund notified by the Central Government within 6 months from the date of transfer of the original asset.

Key parameters of Section 54EE:

• Maximum investment: The amount invested in the notified long-term specified asset is capped at ₹50 lakh.
• Lock-in period: The investment must remain in the notified fund for a minimum of 3 years. If the amount is withdrawn before 3 years, the exemption is revoked in the year of withdrawal and the capital gains become taxable in that year.
• Asset type: The original asset transferred must be a long-term capital asset. Short-term capital gains do not qualify.
• Fund requirement: The fund must be specifically notified by the Central Government for this purpose. Startups and their advisors should verify which funds are currently notified before directing investments under this section.

Section 54EE complements Section 54GB. Where 54GB applies to individuals reinvesting in startup equity directly, 54EE applies to gains reinvested into government-notified startup funds, broadening the pool of eligible investment vehicles.

Table: overview of key tax exemptions for startups

Tax provision	Exemption offered	Key benefit for startups
Section 80-IAC	Tax holiday for the first 3 years of operation	Provides substantial tax relief, allowing startups to reinvest in growth
Section 54GB	Capital gains exemption for investments in startup equity	Encourages investment by offering tax relief on capital gains
Section 54EE	LTCG exemption on investment in notified funds (cap ₹50 lakh, 3-year lock-in)	Broadens eligible investment vehicles beyond direct equity
Section 56(2)(viib)	Angel tax abolished from 01/04/2025	Removes tax on equity issued above FMV, simplifies fundraising
Section 79	Relaxed carry-forward of losses for eligible startups	Protects tax losses during funding rounds with shareholding changes
Section 115BAB	15% base tax rate for new domestic manufacturing companies	Lower tax rate for manufacturing-focused startups (conditions apply)

What non-tax benefits does Startup India offer beyond tax exemptions?

DPIIT recognition opens more than just the tax filing cabinet. The Startup India scheme attaches a set of regulatory and financial benefits that are independent of any tax provision and that most founders only discover after they have already missed the application window.

Labour law self-certification

DPIIT-recognised startups can self-certify compliance under 9 labour laws and 3 environmental laws for a period of 3 to 5 years from the date of recognition, depending on the specific law. This means no routine government inspections during that window. The 9 labour laws covered include the Building and Other Construction Workers Act 1996, the Contract Labour (Regulation and Abolition) Act 1970, the Employees Provident Funds and Miscellaneous Provisions Act 1952, the Employees State Insurance Act 1948, the Industrial Disputes Act 1947, the Industrial Employment (Standing Orders) Act 1946, the Inter-State Migrant Workmen Act 1979, the Payment of Gratuity Act 1972, and the Payment of Wages Act 1936. The 3 environmental laws covered are the Water (Prevention and Control of Pollution) Act 1974, the Water (Prevention and Control of Pollution) Cess Act 1977, and the Air (Prevention and Control of Pollution) Act 1981.

This benefit matters practically: it removes the compliance overhead of maintaining separate inspection-ready documentation files for each of these laws during the startup’s early scaling phase.

Patent and IP fast-tracking

DPIIT-recognised startups are entitled to an 80% rebate on patent filing fees. Patent applications from startups are also fast-tracked through an expedited examination process, reducing typical examination timelines significantly. For a deep-tech or biotech startup where IP protection is a condition of investor entry, this benefit can reduce the time to a granted patent by 12 to 18 months compared to the standard track.

Public procurement access

DPIIT-recognised startups can participate in government tenders without the usual prior experience or turnover requirements. The government has exempted startups from earnest money deposit requirements and prior experience criteria that typically exclude young companies from public procurement. This opens a significant revenue channel for B2G startups.

Credit guarantee scheme access

The Credit Guarantee Fund for Startups (CGFS), operated by the National Credit Guarantee Trustee Company (NCGTC), provides collateral-free debt guarantee coverage for DPIIT-recognised startups accessing scheduled commercial bank loans. Cover extends up to ₹10 crore per borrower. This reduces the personal guarantee burden on founders during early-stage debt financing.

Benefit	Governed by	Condition
Labour law self-certification	Startup India Action Plan, 2016	DPIIT recognition
Patent fee rebate (80%)	IPO notification	DPIIT recognition
Patent fast-track examination	IPO notification	DPIIT recognition
Public procurement exemption	DIPP Policy Note, 2016	DPIIT recognition
CGFS debt guarantee	NCGTC scheme	DPIIT recognition + bank linkage

How to apply for startup tax exemption in India

Applying for startup tax exemptions in India involves a clear and structured process. Below is a concise guide to help startups navigate the application process and claim their exemptions.

Step-by-step guide to apply for Section 80-IAC exemption

The 80-IAC exemption offers a tax holiday for startups in India, reducing their tax liability for the first three years of operation. To apply for this exemption, follow these steps:

Step 1: Ensure eligibility

• The startup must be DPIIT-recognised.
• The business should be less than 10 years old and have an annual turnover of less than ₹100 crore.
• It must be involved in innovation, development, or improvement of products and services.
• Only private limited companies and LLPs are eligible. Partnership firms recognised by DPIIT do not qualify for Section 80-IAC.

Step 2: Obtain DPIIT recognition

• Apply for DPIIT recognition through the NSWS portal (nsws.gov.in).
• Submit the required documents, including incorporation certificate, PAN, and a detailed description of the innovation or scalable business model.
• See the dedicated section above on the NSWS application process for the full step-by-step.

Step 3: Submit Form 1 to the Income Tax Department

• Complete and submit Form 1 under the Income Tax Act.
• This form is available on the official Income Tax Department website or through your tax consultant.
• Form 1 is the application for the Inter-Ministerial Board (IMB) certificate, which is the approval that actually grants the Section 80-IAC tax holiday. The IMB is a body constituted by the DPIIT and includes representatives from the Departments of Biotechnology, Science and Technology, and the Ministry of Electronics and Information Technology. IMB approval is a separate step from DPIIT recognition and is mandatory for claiming the 80-IAC tax holiday. Missing this step is one of the most common reasons eligible startups fail to claim the benefit.

Step 4: Provide necessary documents

• DPIIT recognition certificate
• Incorporation certificate (company or LLP)
• Proof of innovation (business plan, product descriptions, etc.)
• Tax returns (if applicable)
• Financial statements

Step 5: Await approval

• The Income Tax Department will review your application.
• Upon approval, the startup will receive confirmation of the 80-IAC tax holiday.

How to claim the Startup India income tax exemption

To claim tax exemptions under the Startup India program, businesses must complete a few steps to ensure compliance and access available benefits.

Step 1: Register on the Startup India portal

• Visit the Startup India website and register your business. Make sure to provide accurate details about your business and its innovative nature.
• After registration, you will receive a DPIIT recognition certificate, which is mandatory for claiming tax exemptions.

Step 2: Apply for tax exemption

• Once registered, fill out the required forms for income tax exemptions under Section 80-IAC.
• Ensure that all documentation supporting your business’s eligibility is included, such as your business plan and turnover details.

Step 3: Submit documents for angel tax exemption

• If applicable (for assessment years prior to AY 2025-26), submit necessary documents for angel tax exemption to ensure investors are not taxed on their investments in your startup. From AY 2025-26 onwards, Section 56(2)(viib) has been abolished and this step is no longer relevant for new fundraises.

Step 4: Meet deadlines

• Important deadlines for filing applications and claiming exemptions are typically tied to the financial year.
• Ensure timely submission of your tax forms and documents before the due dates to avoid any delays.

Step 5: File income tax returns

• Once you have submitted all necessary forms, file your Income Tax Returns (ITR) as per the regular tax deadlines to officially claim the exemptions.

Important deadlines and forms

• Form 1 (DPIIT registration): To be submitted when applying for DPIIT recognition via NSWS.
• Form 1 (80-IAC application): Submitted to the Income Tax Department for IMB approval and the tax holiday certificate.
• Form 56: Used for claiming exemptions under Section 80-IAC in the ITR.
• Income Tax filing deadlines: Ensure compliance with annual ITR deadlines to avoid penalties.

Startups must be aware of the financial year deadlines and submit their applications and claims on time to benefit from the Startup India tax exemption.

Other key tax benefits for startups in India

The provisions below sit outside the core 80-IAC holiday but are equally worth planning for, depending on the startup’s funding structure, sector, and hiring model.

Angel tax abolished: what the Section 56(2)(viib) removal means for startups in 2026

Angel tax was levied under Section 56(2)(viib) of the Income Tax Act when a closely held company issued shares at a price higher than the fair market value (FMV) of those shares. The excess over FMV was treated as income in the hands of the issuing company and taxed at applicable rates. For early-stage startups, where valuations are inherently speculative and investor confidence drives pricing above any defensible FMV, this created a persistent compliance and litigation risk.

The Finance Act 2024 abolished Section 56(2)(viib) in its entirety, with effect from 01/04/2025 (applicable from Assessment Year 2025-26 onwards). This means:

• Any equity issued by a startup at a premium above FMV on or after 01/04/2024 is not taxable as income in the hands of the startup.
• DPIIT-recognised startups no longer need to file for angel tax exemption for new fundraising rounds.
• Existing assessments and notices for years prior to AY 2025-26 continue under the old law and must be defended on their merits.

This is a structurally significant change for the fundraising environment. Seed and pre-Series A rounds, where pricing was most contentious, are now free of this overhang. Founders who received demand notices in earlier years should work with a tax advisor to assess their position under ongoing scrutiny.

For startups that had previously obtained exemption certificates from DPIIT under the old regime (Form 2 for angel tax exemption), those certificates are now largely academic for new transactions but may still be relevant for defending prior-year assessments.

Section 79: carry forward of losses for funded startups

This is a provision that matters most to startups that have raised external capital and gone through funding rounds involving a change in shareholding. Under the general rule in Section 79 of the Income Tax Act, a closely held company cannot carry forward and set off its losses if there is a change in the beneficial ownership of shares such that shareholders holding at least 51% of the voting power on the last day of the year in which the loss was incurred do not continue to hold those shares on the last day of the year in which the loss is to be set off.

For a startup that raised a Seed round in Year 1 (incurring losses), then raised a Series A in Year 2 with significant dilution, this restriction could eliminate the ability to carry forward those Year 1 losses, increasing future tax liability precisely when the startup begins to become profitable.

The Startup India scheme relaxes this rule for eligible startups under Section 79. The relaxation allows carry-forward of losses for an eligible startup as long as all shareholders who held shares on the last day of the year in which the loss was incurred continue to hold their shares on the last day of the year in which the loss is to be set off. The 51% voting power continuity requirement is not applied in the same strict manner, giving meaningful protection to startups going through dilutive funding rounds.

Key conditions to retain the Section 79 relaxation:

• The entity must be a DPIIT-recognised startup.
• The loss was incurred in a year when the entity qualified as an eligible startup.
• The original shareholders from the loss year continue to hold shares (even if the percentage has reduced due to new investor entry).
• The startup has not been formed by splitting or reconstructing an existing business.

This protection is particularly valuable for startups that raised angel or seed capital early, accumulated operating losses, and are now approaching profitability after a Series A or B. Ensuring that the original founding team and early investors retain some shareholding (even a small percentage) is an important structuring consideration.

Section 35: R&D deductions for startups investing in innovation

Startups that invest in scientific research and development can claim deductions under Section 35 of the Income Tax Act. While this is a general provision and not restricted to DPIIT-recognised startups, it is particularly relevant for startups in technology, biotech, pharma, and deep science.

The key variants are:

• Section 35(1)(i): 100% deduction for revenue expenditure on scientific research related to the business.
• Section 35(1)(ii): 100% deduction for contributions to approved scientific research associations, universities, or institutions.
• Section 35(2AB): Weighted deduction for in-house R&D expenditure by companies engaged in the business of bio-technology or in the business of manufacture or production of eligible articles. The weighted deduction rate has been revised over successive budgets; startups should verify the current rate applicable to their assessment year with a tax advisor.

For a deep-tech or biotech startup, combining Section 35 deductions with the Section 80-IAC tax holiday can significantly reduce the overall tax burden during the first decade of operations.

ESOP perquisite tax deferral for startup employees

This is one of the most underused benefits available to DPIIT-recognised startups that hold a valid IMB certificate. Under Section 192(1C) of the Income Tax Act 1961 (renumbered as Section 392(1C) under the Income Tax Act 2025, effective from 01/04/2026), employees of eligible startups can defer the payment of tax on the perquisite value of ESOP shares allotted to them.

Normally, when an employee exercises their ESOP options and shares are allotted, the perquisite (the difference between the fair market value on exercise date and the exercise price) is taxable as salary income in that year, and TDS is required. For an early employee who holds a large ESOP grant, this can create a large, immediate tax bill even before the shares are sold.

The Section 192(1C) deferral works as follows:

• The employer does not deduct TDS on the perquisite at the time of allotment.
• The deferred tax becomes payable at the earliest of: 48 months from the end of the assessment year in which the shares were allotted (extended to 60 months for allotments from 01/04/2026 under the Income Tax Act 2025); the date on which the employee sells or transfers the shares; or the date on which the employee ceases to be an employee of the startup.
• The tax rate applied is the slab rate applicable in the year of allotment, not the year of payment.

Critical requirement: DPIIT recognition alone does not qualify a startup for this deferral. The employer must also hold a valid IMB certificate under Section 80-IAC. This is the same certificate needed for the income tax holiday, and it is the reason why filing Form 1 early matters beyond just the profit exemption years. A startup that obtains the IMB certificate before granting ESOPs protects both its own tax position and its employees’ deferred tax position.

For a startup that expects to issue ESOPs at an early stage and anticipates a liquidity event within 5 years, the financial impact of the deferral is material. An employee exercising options worth ₹50 lakh in perquisite value can defer approximately ₹15 to 16 lakh in tax (at a 30% slab) until the shares are sold, rather than paying it in the year of exercise with no liquidity from the shares.

Section 115BAB: lower corporate tax for new manufacturing startups

Section 115BAB provides a concessional income tax rate of 15% (plus applicable surcharge and cess, resulting in an effective rate of approximately 17.01%) for new domestic manufacturing companies incorporated on or after 01/10/2019 and commencing manufacturing on or before 31/03/2024 (the deadline has been extended in successive budgets; startups should verify the current cut-off date).

This provision is relevant for startups building physical products, hardware, or infrastructure-linked manufacturing operations. Key conditions:

• The company must not be formed by splitting up or reconstruction of an existing business.
• The company should not use any plant and machinery previously used for any purpose.
• The company should not use any building previously used as a hotel or convention centre.
• The company opts in under Section 115BAB by filing Form 10-IC before filing the return of income for the relevant year. Once opted, the company cannot revert to the regular tax regime.

A manufacturing startup that qualifies under both Section 80-IAC and Section 115BAB should evaluate which route offers greater benefit given their profit profile, since both cannot be claimed simultaneously. Section 80-IAC offers a 100% exemption for 3 years; Section 115BAB offers a 15% rate for the company’s entire lifetime. The right choice depends on the timing of profitability, the scale of profits expected in the exemption years, and the long-term tax rate trajectory. Treelife routinely models both scenarios for manufacturing-focused founders before making the election.

Fund of Funds for Startups (FFS): what it is and how to access it

The Fund of Funds for Startups (FFS) is a government-backed funding mechanism established by DPIIT in June 2016 with a corpus of ₹10,000 crore. It is managed by the Small Industries Development Bank of India (SIDBI) and does not invest directly in startups. Instead, it provides capital to SEBI-registered Alternate Investment Funds (AIFs), known as daughter funds, which in turn invest in Indian startups through equity and equity-linked instruments.

The FFS is not a tax exemption. It is a capital access mechanism that expands the pool of institutional venture funding available to DPIIT-recognised startups by backstopping AIF managers who might otherwise be unable to raise domestic capital. By the time SIDBI’s last public disclosures were available, committed capital to daughter AIFs had crossed ₹3,100 crore across more than 45 SEBI-registered funds.

How a startup accesses FFS capital:

• Direct application to SIDBI is not possible. Startups must be identified and evaluated by one of the daughter AIFs.
• DPIIT recognition is a prerequisite for most daughter funds, which use it as a threshold eligibility filter.
• Startups should track which AIFs have received FFS capital through SIDBI’s published list and approach those funds directly through their standard investment processes.

The FFS is structurally similar to the government’s anchor LP commitments to venture funds in the US and Israel. Its relevance to a startup’s tax strategy is indirect: it expands the ecosystem of domestic institutional investors who might participate in a fundraising round, which in turn reduces the founder’s reliance on foreign venture capital and simplifies the FEMA compliance position.

What changes under the Income Tax Act 2025 for startup exemptions from FY 2026-27?

The Income Tax Act 2025 replaced the Income Tax Act 1961 with effect from 01/04/2026. For the purposes of startup tax exemptions, the substantive rules remain unchanged. The key change is section renumbering, which affects every tax return filed for Tax Year 2026-27 (Assessment Year 2027-28) onwards.

Section number mapping for startup exemptions

Provision (IT Act 1961)	New section (IT Act 2025)	Status
Section 80-IAC (income tax holiday)	Section 158	Substantively unchanged
Section 56(2)(viib) (angel tax)	Abolished from 01/04/2025	Abolished, not renumbered
Section 54GB (LTCG on startup equity)	Section 82	Substantively unchanged
Section 54EE (LTCG in notified funds)	Section 83	Substantively unchanged
Section 79 (carry forward of losses)	Section 101	Substantively unchanged
Section 35 (R&D deductions)	Section 47	Substantively unchanged
Section 115BAB (15% manufacturing rate)	Section 169	Substantively unchanged
Section 192(1C) (ESOP deferral)	Section 392(1C)	Extended lock-in to 60 months from 01/04/2026

The practical implication: any startup filing ITR for Tax Year 2026-27 and beyond should reference the new section numbers. Any Form 1 application filed before 01/04/2026 under the old Act numbers remains valid; it does not need to be refiled. Accountants and tax consultants who are still using 1961 Act section references in 2026-27 filings are filing inaccurately, and the correction obligation falls on the company.

The one substantive change affecting startups is the ESOP deferral window extension under Section 392(1C): allotments from 01/04/2026 onwards carry a 60-month deferral window instead of 48 months. This is a meaningful improvement for startups where the liquidity event timeline is 4 to 5 years post-exercise.

Combining tax exemptions: a strategic approach for startups

Most startups claim only one or two of the available exemptions, often because they become aware of them sequentially rather than as a planned stack. The smarter approach is to map the full set of applicable exemptions at the time of incorporation and early fundraising, because several of these provisions have time-bound elections or conditions that, once missed, cannot be retroactively triggered.

Here is a practical framework for how a typical funded startup should think about the full stack:

At incorporation:

• Decide immediately whether the entity will be a private limited company or LLP, since partnership firms are excluded from Section 80-IAC.
• If a manufacturing business, evaluate Section 115BAB vs Section 80-IAC before the first profitable year.

At DPIIT recognition (typically within the first 1-2 years):

• Apply for DPIIT recognition through NSWS as early as possible, even before profitability. Recognition does not require the startup to be profitable. Early recognition protects the angel tax position for past and future fundraising rounds, and starts the clock on the 80-IAC eligibility window.
• After recognition, file Form 1 with the Income Tax Department for IMB approval under Section 80-IAC. Do not wait until the first profitable year. The application can be filed prospectively.

At the first fundraising round:

• Angel tax is no longer a concern for rounds from FY 2024-25 onwards. For any open notices or assessments from prior years, confirm your DPIIT recognition certificate was in place at the time of the relevant share issue.
• Advise investors who are individuals or HUFs and are selling long-term assets to explore Section 54GB and Section 54EE as routes to reinvest capital gains into the startup tax-efficiently. This can significantly increase the pool of capital available from high-net-worth individuals.

During loss-making years:

• Ensure the shareholding continuity conditions under Section 79 are understood before each new funding round. If the founding team and early investors are likely to dilute below 51%, structuring the cap table thoughtfully can preserve the Section 79 relaxation.

At ESOP grant:

• Confirm that the IMB certificate is in place before issuing ESOP grants to employees. The Section 392(1C) deferral (60-month window from 01/04/2026) only applies where both DPIIT recognition and IMB certification are valid at the time of allotment.

At the onset of profitability:

• Claim the Section 80-IAC holiday for 3 consecutive years (chosen from the first 10 years). The startup is not required to start the exemption from Year 1 of profitability. It can choose the 3 most profitable years within the first 10, though most advisors recommend starting as early as possible to maximise the quantum of exemption.

For R&D-intensive startups:

• Layer Section 35 deductions over the Section 80-IAC exemption years. The deductions reduce taxable profits, while the holiday exempts what remains. In deep-tech businesses, this combination can bring taxable income to near-zero in the early years.

Common mistakes that cost founders the exemption

Most of these errors are silent. The startup files its ITR, assumes the benefit is in place, and discovers the gap only when a demand notice arrives.

• Missing IMB approval: DPIIT recognition and IMB approval are two separate applications on two different portals. The 80-IAC holiday cannot be claimed without the IMB certificate, regardless of how long the DPIIT certificate has been held.
• Generic innovation description: Vague NSWS descriptions like “technology-based solutions” are returned or rejected. Write a specific, product-level explanation of what the business does and why it is novel.
• Wrong entity type: Partnership firms recognised by DPIIT do not qualify for Section 80-IAC. Convert to LLP or private limited company before the exemption years begin.
• Late ITR filing: The 80-IAC benefit is denied for any year in which the ITR is filed after the due date. No exceptions.
• Evolved business activities: If the startup has added real estate, lending, or trading to its model since recognition, the DPIIT certificate may no longer be valid. Review periodically.
• Section 79 not planned before fundraising: Once a round closes and the cap table changes, the window to structure shareholding continuity has passed. The loss carry-forward is gone.
• IMB certificate not in place before ESOP allotment: The Section 392(1C) deferral cannot be applied retroactively. Issue ESOPs only after the IMB certificate is obtained.
• Prior angel tax notices: The abolition of Section 56(2)(viib) from 01/04/2025 applies prospectively. Demand notices for AY 2024-25 and earlier must be defended on their own merits with a tax advisor.

FAQs on Tax Benefits for startups in India

Q: What is the 80-IAC exemption for startups in India?
A: The 80-IAC exemption provides a 100% income tax holiday on profits for eligible startups for any 3 consecutive years out of the first 10 years from incorporation. The startup must be DPIIT-recognised, incorporated as a private limited company or LLP after 01/04/2016, and must have obtained IMB approval before claiming the exemption.

Q: Who can apply for the Startup India tax exemption?
A: Any startup recognised by the DPIIT that meets specific conditions a private limited company or LLP, incorporated after 01/04/2016, annual turnover under ₹100 crore, working towards innovation or scalable business models can apply for the Section 80-IAC tax holiday.

Q: What is the tax holiday for startups in India?
A: The tax holiday refers to a 100% exemption from paying income tax on profits for startups during any 3 consecutive years within their first 10 years of operation. This is not automatic on DPIIT recognition; it requires a separate Form 1 application and IMB approval from the Income Tax Department.

Q: How do I claim tax exemption under Section 80-IAC?
A: The process involves three stages: (1) obtain DPIIT recognition via the NSWS portal, (2) file Form 1 with the Income Tax Department for IMB approval, and (3) claim the exemption in the ITR for the relevant year once the IMB certificate is in hand. Missing the IMB step is the most common filing error.

Q: How does Section 54GB help startups with capital gains exemptions?
A: Section 54GB allows individuals and HUFs who sell a long-term capital asset (including residential property) to claim capital gains exemption if the proceeds are invested in at least 50% equity shares of an eligible DPIIT-recognised startup. The shares must be held for at least 5 years and the startup must use the funds to purchase assets held for at least 5 years.

Q: What is Section 54EE and how is it different from Section 54GB?
A: Section 54EE allows any taxpayer to invest LTCG of up to ₹50 lakh into a Central Government-notified startup fund within 6 months of the asset transfer and claim exemption on those gains. The investment must stay locked in for 3 years. Section 54GB applies to direct equity investment in eligible startups; Section 54EE applies to investment in notified funds.

Q: Can foreign-funded startups benefit from India’s tax exemptions?
A: Yes, Section 80-IAC applies to both Indian-funded and foreign-funded startups, provided they meet the DPIIT recognition criteria and business nature requirements. FEMA compliance for the foreign investment is a separate requirement and must be handled through the applicable RBI route (automatic or approval).

Q: Is angel tax still applicable to startups in India in 2026?
A: No. Section 56(2)(viib), which governed angel tax, was abolished by the Finance Act 2024 with effect from 01/04/2025 (AY 2025-26 onwards). Equity issued at a premium above FMV on or after 01/04/2024 is no longer taxable as income in the hands of the issuing company. Prior year assessments continue under the old law.

Q: What is the Section 79 relaxation for startups and why does it matter?
A: Section 79 generally prevents a closely held company from carrying forward losses if majority shareholders change. For eligible startups, this rule is relaxed: losses can be carried forward as long as the original shareholders from the loss year continue to hold shares (even a small stake), regardless of the percentage. This matters for any startup that has taken on external funding and diluted the founding team’s stake.

Q: What are the special eligibility rules for DeepTech startups?
A: DeepTech startups can be recognised by DPIIT for up to 20 years from incorporation (vs 10 years for general startups) and can have a turnover of up to ₹300 crore in any previous financial year (vs ₹200 crore for general startups). The Section 80-IAC eligibility criteria (private limited or LLP, incorporated after 01/04/2016, turnover under ₹100 crore) remain the same.

Q: What is the fee for DPIIT recognition?
A: Nil. The Ministry of Commerce and Industry does not charge any fee for the DPIIT Certificate of Recognition. Applications must be filed by the startup itself on the NSWS portal using its own credentials. No agency or franchise is authorised by DPIIT for this purpose.

Q: Can a partnership firm claim the Section 80-IAC tax holiday?
A: No. Partnership firms can obtain DPIIT recognition but are not eligible for the Section 80-IAC income tax holiday. Only private limited companies and LLPs qualify for this specific provision. A partnership firm seeking the 80-IAC benefit would need to convert to an LLP or private limited company before the exemption years begin.

Q: What happens if a startup’s turnover crosses ₹100 crore during the Section 80-IAC exemption period?
A: The Section 80-IAC exemption is not available for any financial year in which the startup’s turnover exceeds ₹100 crore. The startup would be taxable at normal rates for that year. If it qualifies again in subsequent years (which would require the turnover to drop back below ₹100 crore), the exemption can be claimed for the remaining years in the 10-year window, subject to the 3-year consecutive rule.

Q: Can a startup claim both Section 80-IAC and Section 115BAB?
A: No. A startup cannot simultaneously claim the 100% Section 80-IAC holiday and the 15% Section 115BAB rate. A manufacturing startup must elect one route. The right choice depends on the quantum of profits expected in the exemption years and the long-term tax rate trajectory. Modelling both scenarios before the first profitable year is strongly recommended.

Q: Which sectors are excluded from DPIIT startup recognition?
A: Businesses in real estate development, NBFC lending, commodity trading, tobacco, liquor, gambling, and pan masala are routinely excluded. Any entity formed by splitting or reconstructing an existing business is also ineligible regardless of sector. If your business has evolved since recognition to include any of these activities, review whether your recognition remains valid.

Q: What labour law exemptions do DPIIT-recognised startups get?
A: DPIIT-recognised startups can self-certify compliance under 9 labour laws and 3 environmental laws for 3 to 5 years, avoiding routine government inspections during that window. The 9 labour laws covered include the Employees Provident Funds Act 1952, the Employees State Insurance Act 1948, the Industrial Disputes Act 1947, the Payment of Gratuity Act 1972, and five others under the Startup India Action Plan 2016.

Q: How does the ESOP perquisite tax deferral work for startup employees?
A: Under Section 392(1C) of the Income Tax Act 2025 (previously Section 192(1C)), employees of eligible startups with both DPIIT recognition and a valid IMB certificate can defer TDS on the ESOP perquisite (the FMV gain at exercise) until the earliest of 60 months from allotment, the date of sale, or the date of leaving the company. This deferral requires the IMB certificate to be in place at the time of allotment.

Q: What is the Fund of Funds for Startups and can a startup apply directly?
A: The Fund of Funds for Startups (FFS) is a ₹10,000 crore government corpus managed by SIDBI that provides capital to SEBI-registered AIFs (daughter funds), which then invest in DPIIT-recognised startups. Direct applications to SIDBI are not possible. Startups must be selected by a daughter AIF through its standard investment process.

Q: What changes under the Income Tax Act 2025 for startup exemptions?
A: The substantive rules for all major startup tax exemptions remain unchanged. What changed from 01/04/2026 is the section numbering. Section 80-IAC is now Section 158, Section 79 is now Section 101, Section 35 is now Section 47, and Section 115BAB is now Section 169. The ESOP deferral window was extended from 48 to 60 months for allotments from 01/04/2026 onwards under the new Act.

Regulatory references:

• Section 80-IAC (now Section 158), Income Tax Act 1961 / Income Tax Act 2025
• Section 54GB (now Section 82), Income Tax Act 1961 / Income Tax Act 2025
• Section 54EE (now Section 83), Income Tax Act 1961 / Income Tax Act 2025
• Section 56(2)(viib), Income Tax Act 1961 (abolished by Finance Act 2024, w.e.f. 01/04/2025)
• Section 79 (now Section 101), Income Tax Act 1961 / Income Tax Act 2025
• Section 35 (now Section 47), Income Tax Act 1961 / Income Tax Act 2025
• Section 115BAB (now Section 169), Income Tax Act 1961 / Income Tax Act 2025
• Section 192(1C) (now Section 392(1C)), Income Tax Act 1961 / Income Tax Act 2025
• G.S.R. notification 108(E), Department for Promotion of Industry and Internal Trade
• Finance Act 2024
• Income Tax Act 2025 (effective 01/04/2026)
• Startup India Action Plan, 2016
• Credit Guarantee Fund for Startups (CGFS), NCGTC scheme

External sources:

• Startup India
• Income Tax India
• National Single Window System
• Ministry of Corporate Affairs
• SIDBI
• DPIIT