Tax Exemption for Startups in India (2026) – Eligibility, Incentives, DPIIT Recognition

Executive Summary

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 is tax exemption for startups in India?

Tax exemption for startups in India refers to the financial benefits provided by the government to encourage the growth and development of new businesses. These exemptions are designed to reduce the tax burden, especially during the initial years of operation, allowing startups to reinvest savings into business expansion, research, and innovation.

India offers various tax exemptions under schemes like Startup India and tax provisions within the Income Tax Act. These exemptions are available to eligible startups in the form of tax holidays, capital gains exemptions, and exemptions on angel tax. By providing these incentives, the government aims to create an ecosystem that supports the success of startups, fostering an environment where entrepreneurship can thrive.

Key tax exemptions for startups in India include:

• Section 80-IAC: Tax holiday for startups, exempting them from income tax for the first three years.
• Section 54GB: Capital gains exemption for reinvestment in eligible startups.
• Section 54EE: Exemption on long-term capital gains invested in DPIIT-notified funds.
• Section 56(2)(viib): Angel tax, abolished with effect from 01/04/2025.
• Section 79: Relaxed carry-forward of losses for eligible startups.

These provisions allow startups to direct more of their resources into scaling their business rather than spending on taxes.

Why are tax exemptions important for startups?

Tax exemptions play a crucial role in the development and sustainability of startups in India. Here is why these exemptions are vital:

1. Financial relief for startups
   Tax exemptions help startups manage high operating costs and reinvest savings in product development, marketing, and hiring, easing early financial challenges.
2. Encouragement for investment
   Tax exemptions attract investors by reducing risks, with Section 80-IAC offering relief to angel investors and the Startup India initiative incentivising investments in innovative businesses.
3. Fostering innovation
   With reduced financial pressure, startups can focus on R&D, leading to innovations that fuel growth and benefit the economy.
4. Promoting job creation
   As startups grow, tax savings allow them to hire more talent, reducing unemployment and fostering career opportunities.
5. Boosting the economy
   Startups drive economic growth by creating jobs, attracting investments, and enhancing productivity, supported by tax exemptions that nurture the ecosystem.

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.

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.

Tax holiday for startups in India: what it means for new businesses

A tax holiday for startups is a period during which a startup is exempt from paying certain taxes. This exemption is primarily aimed at giving businesses a financial cushion during their early years, when they are most vulnerable.

Overview of tax holiday for startups in India:

• Reduced financial burden: Startups can save significantly on taxes during the initial years of operation, allowing them to focus on business development, product innovation, and scaling operations.
• Government initiatives: The Startup India initiative and other government programs offer tax holidays to DPIIT-recognised startups for the first three years, with some exceptions for a longer duration in specific cases.
• Eligibility criteria: The startup must be recognised by the DPIIT, and it must be involved in innovation and scalable business models. The company should not exceed an annual turnover of ₹100 crore.

Income tax exemption for startups in India under the Startup India program

The Startup India initiative launched by the Indian government provides several income tax exemptions to promote entrepreneurship and the growth of new businesses.

Key benefits of the Startup India tax exemption program:

• Tax holiday for the first 3 years: Section 80-IAC offers a tax holiday for DPIIT-recognised startups in their initial three years, providing substantial relief to businesses in their early, growth stages.
• Exemption on capital gains: The Startup India program also provides capital gains tax exemptions under Section 54GB to encourage investment in startup equity.

Eligibility and documentation:

• DPIIT recognition: Startups must be recognised by the Department for Promotion of Industry and Internal Trade to claim the tax exemptions.
• Business requirements: The business must be involved in an innovative, technology-driven, or scalable business model and meet the age and turnover conditions set by the government.
• Required documents: To apply for the tax exemptions, startups must submit documentation like the DPIIT recognition certificate, business registration documents, and proof of capital raised or profits generated.

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)

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

In addition to the well-known Section 80-IAC and Startup India tax exemptions, there are other significant tax benefits available to startups in India. These benefits are designed to incentivise investment and support the growth of innovative businesses.

Section 80-IAC exemption for investment in startups: how investors benefit

Section 80-IAC not only benefits startups but also provides significant relief to investors. The key benefits include:

• Tax relief on investments: Investors in DPIIT-recognised startups can avail themselves of tax relief on their investments. This reduces the financial risk for angel investors and venture capitalists.
• Encourages investment: By offering tax incentives, Section 80-IAC makes startup investments more attractive, fostering a conducive environment for innovation.

Tax benefits under Section 54GB: capital gains and more

Section 54GB offers capital gains tax exemptions for startups that reinvest capital gains into eligible equity shares of startups. Key points include:

• Capital gains exemption: Investors can avoid capital gains tax when reinvesting profits from the sale of long-term assets into startup equity.
• Supports investment: This exemption helps startups attract investment from individuals looking to reinvest their gains in innovative businesses, promoting further growth.

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.

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.

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 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 issues and pitfalls when applying for startup tax exemption

Common mistakes in the 80-IAC application process

Startups often miss required documents or fail to meet eligibility criteria like turnover limits or DPIIT recognition. To avoid this, ensure all forms are accurate, complete, and submitted on time.

The most common mistakes Treelife sees in practice are:

• Missing IMB approval: DPIIT recognition and IMB approval are two separate steps. Many founders assume recognition is sufficient and skip the Form 1 application to the Income Tax Department. The 80-IAC holiday cannot be claimed without the IMB certificate.
• Incomplete or generic innovation description: The NSWS form asks for a substantive explanation of the innovation. Generic descriptions are returned or result in rejection. Spend time writing a specific, product-level description.
• Incorrect entity type: Partnership firms recognised by DPIIT do not qualify for Section 80-IAC. If the entity was set up as a partnership for simplicity and is approaching profitability, conversion to LLP or private limited company may need to be considered before the exemption years begin.
• Late filings and missed deadlines: The 80-IAC benefit is only available for years in which the startup’s ITR is filed on time. A late ITR can result in the exemption being denied for that year.
• Engaging in ineligible business activities: Certain sectors are excluded from startup recognition. If the business model has evolved to include real estate development, lending, or trading activities, the DPIIT recognition could be at risk. Periodic review of the business description on record is good practice.
• Failure to maintain compliance during the claim period: A startup must continue to meet all eligibility conditions during the years it is claiming the 80-IAC holiday. If turnover crosses ₹100 crore in any year during the exemption window, the exemption for that year is not available.
• Not planning the Section 79 position before fundraising: Losing the ability to carry forward accumulated losses is a direct financial cost. Founders frequently discover the Section 79 relaxation only after a funding round has closed and the cap table has already changed.
• Over-relying on the angel tax abolition without addressing prior notices: The abolition applies prospectively. Startups that received demand notices or are under assessment for AY 2024-25 or earlier cannot use the abolition as a defence for those years.

Issues with angel tax and how to avoid them

Angel tax issues arise when startups are taxed on equity investments above fair market value. Section 80-IAC previously removed this burden by exempting DPIIT-recognised startups from angel tax. From AY 2025-26 onwards, Section 56(2)(viib) has been abolished entirely, making it no longer applicable to new transactions. For any ongoing or pending assessments related to prior years, startups should engage a qualified tax advisor to evaluate available defences, including whether a DPIIT recognition certificate was in force at the relevant time.

Treelife practitioner note: What Founders actually get wrong

Most founders we work with discover tax exemptions reactively, often when their CA flags it during the first profitable year’s audit. By then, two things have sometimes already gone wrong: the startup has not filed Form 1 for the IMB approval (so the 80-IAC exemption cannot be claimed for that year), and one or more funding rounds have been completed without modelling the Section 79 impact on carried-forward losses.

The 80-IAC holiday sounds simple 3 years, 100% exemption but it sits inside a compliance sequence that has at least four distinct steps across two different government portals and two different applications (DPIIT recognition and IMB approval). Missing one step does not generate an obvious error; the startup simply loses the benefit silently, and discovers this only when a demand is raised.

The second recurring issue is the Section 79 carry-forward position. A startup that burned ₹5 crore in its first two years, then raised a Series A with significant dilution, may have inadvertently given up the ability to offset those losses against future profits unless the shareholding continuity conditions are met. In a business projecting ₹10 crore in profits in Year 4, that ₹5 crore loss carry-forward is worth approximately ₹1.5 crore in tax at the standard corporate rate. It is worth structuring for.

Neither of these issues is difficult to handle when planned in advance. The cost of not planning is real and is measured in lakhs to crores.

Case study: how a SaaS startup saved ₹1.2 crore by filing the IMB application in time

Situation: A Series A B2B SaaS startup based in Bengaluru, incorporated in FY 2019-20, DPIIT-recognised since FY 2020-21, had been operating at a loss through FY 2022-23. FY 2023-24 was the first profitable year, with taxable profits of approximately ₹4.8 crore.

Challenge: The founders assumed DPIIT recognition automatically activated the 80-IAC exemption. Form 1 had never been filed with the Income Tax Department. The CA flagged this during the advance tax computation in October 2023. The startup was 45 days from the advance tax due date.

What Treelife did: Filed Form 1 immediately with all required documents. Coordinated with the Income Tax Department on document requirements. Obtained the IMB certificate before the end of FY 2023-24, allowing the startup to claim the Section 80-IAC exemption for that year.

Outcome: Tax liability for FY 2023-24 reduced from approximately ₹1.2 crore (at the standard corporate rate) to nil. The startup retained the same benefit for FY 2024-25 and FY 2025-26, its remaining exemption years.

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.

Regulatory references

• Section 80-IAC, Income Tax Act 1961
• Section 54GB, Income Tax Act 1961
• Section 54EE, Income Tax Act 1961
• Section 56(2)(viib), Income Tax Act 1961 (abolished by Finance Act 2024, w.e.f. 01/04/2025)
• Section 79, Income Tax Act 1961
• Section 35, Income Tax Act 1961
• Section 115BAB, Income Tax Act 1961
• G.S.R. notification 108(E), Department for Promotion of Industry and Internal Trade
• Finance Act 2024
• Startup India Action Plan, 2016

External sources

• startupindia.gov.in
• incometaxindia.gov.in
• nsws.gov.in
• mca.gov.in