Section 80IAC of Income Tax Act

Introduced on April 1, 2017, Section 80-IAC of the Income Tax Act, 1961, provides eligible startups with a 100% tax deduction on profits for three consecutive years. This provision aims to incentivise startups operating as companies or LLPs engaged in innovation, development, or the enhancement of products and services. By supporting startups with scalable business models that demonstrate significant potential for employment generation and wealth creation, Section 80-IAC facilitates the growth of emerging businesses by allowing them to deduct their entire profits and gains during the specified period. In this article, we will look at the purpose and benefits of Section 80IAC of Income Tax Act, to help you understand how it impacts the startup ecosystem of India.

Section 80-IAC enables eligible startups to avail of a 100% tax exemption on profits for any three consecutive years. 80IAC of Income Tax Act facilitates eligible startups who claim a 100% deduction on gains and profits made resulting from an entitled business that engages in development, innovation, and improved products and/or services, or a scalable business model which has a high potential for generating employment or creating wealth. The Section 80IAC of Income Tax Act offers a deduction spanning a block of 3 consecutive financial years, which allows a startup the flexibility in choosing this timeframe within its five years from the year of the startup’s incorporation. This flexibility is strategic, which gives you a valuable opportunity to stabilise your operations as a startup, and build a strong foundation for future growth.
 

On a different note, are you aware of the new income tax slab rates yet?

Let us now understand what is the purpose of Section 80IAC of Income Tax Act:

• Section 80-IAC is designed to help you grow your startup in its early stages by offering valuable tax benefits.

• It aims to reduce tax evasion, motivating you as a young entrepreneur to become a responsible taxpayer.

• This provision was introduced to encourage you to innovate, utilise research and development, and contribute to a dynamic entrepreneurial ecosystem in India.

• Under Section 80-IAC of Income Tax Act, 1961, you can take advantage of a tax incentive that promotes investments in your startup or other eligible businesses.

Here are the benefits that you can enjoy under the Section 80IAC of Income Tax Act:

• Under Section 80IAC of Income Tax Act, 1961, you can claim a deduction equal to 100% of the profits and gains from your eligible business for three consecutive assessment years.
• This eliminates the need for you to pay advance tax, as your tax liability for that year would be nil.
• These deductions help you manage the tax burden that startups typically face during their early stages.
• By reducing your taxable income, the act eases financial pressure, allowing you to allocate resources more effectively.
• Claiming deductions under Section 80-IAC is straightforward - you can submit a simple online application without incurring any government fees. This easy process simplifies compliance and encourages more startups like yours to take advantage of this tax exemption.

Also read: What Is Hindu Undivided Family

Listed below are the criteria that you must satisfy to comply with Section 80IAC of Income Tax Act 1961:

• As an assessee, you have to be either a Limited Liability Partnership (LLP), or a company that is involved in an eligible business. An “eligible business” can be defined as a business being conducted by an eligible start-up, thereby innovating, developing and/or enhancing products or processes or services, or adopting a scalable business model that is capable of substantial employment creation or wealth generation.

• Your company or LLP has to be incorporated after 31 March, 2016, and before 1 April, 2025.

• Your company or LLP must have an annual business turnover which does not surpass Rs. 100 crore in the year that proceeds the assessment year, for which you are claiming deduction under Section 80IAC of Income Tax Act.

• Your company or LLP should not have been established by reforming or segregating a business that is pre-existing.

• Your company or LLP should not have been established by transferring to a new business of machinery/plant previously used for any purpose.

• As a startup, you are likely involved in the innovation, development, or improvement of products, processes, services, or scalable business models with significant potential to generate employment and wealth.

• Your startup must be recognised by the Ministry of Commerce and Industry, the Department for Promotion of Industry and Internal Trade (DPIIT), and the Government of India.

• According to the Income Tax Act, 1961, when calculating deductions under Section 80IAC, the gains and profits of your eligible business will be computed as if they are your sole source of income during the relevant years.

• Your startup must possess a certificate of eligible business from the Inter-Ministerial Board of Certification, as issued in the Official Gazette by the Indian Central Government.

However, please note that this condition does not apply if your startup was formed as a result of re-establishing or restructuring a business that was discontinued in a previous year due to significant damage or destruction caused by a natural calamity or other unforeseen events, such as riots, civil disturbances, accidental fires, or war, affecting any building, machinery, plant, or furniture owned by you and used for that business.

Also read: What Is Direct Tax Code

1. Applicability: Tax benefits under Section 80-IAC are exclusively available to companies and do not extend to LLPs or individuals.
2. Approval Deadline: Eligible businesses must secure the certificate of approval before the conclusion of the financial year in which they commence operations.
3. Non-Compliance: Failure to meet the conditions outlined in Section 80-IAC may result in the withdrawal of tax benefits by the government.

To claim the deduction under Section 80IAC of Income Tax Act, you must apply for the certificate from the Inter-Ministerial Board of Certification. Here’s how you can apply for the certificate:

• Step 1:
  Start by logging into the Startup India portal. Once logged in, follow the on-screen instructions to apply for the DPIIT recognition certificate through the Startup India registration process.

• Step 2:
  After receiving DPIIT recognition, select ‘claim tax exemption’ and fill out the form with the following details:

  • Name of your startup

  • Date of incorporation

  • Address and business location

  • Incorporation/registration number

  • Nature of business (LLP or PLC)

  • DPIIT number

  • Contact details (including E-mail ID, phone number, and PAN number of the entity)

• Step 3:
  To complete your application for the Section 80-IAC deduction, you need to submit the following documents in PDF format:

  • Limited Liability Partnership Deed (for LLP)

  • Memorandum of Association (for PLC)

  • Board Resolution (if any)

  • CA-certified balance sheet and Profit and Loss statements

  • Financial statements for either the last 3 years or all the years since your startup's establishment

  • Income Tax Returns for either the last 3 years or from the date of establishment

  • A link to a video pitch of your startup

  • Pitch Deck in PDF format

Please note that in case your startup has also obtained a certificate of angel tax exemption, be sure to include the relevant details in your submission.

Also read: Difference Between Income Tax Act and Direct Tax Code

Section 80IAC of Income Tax Act 1961 provides you with a valuable tax incentive if your startup is eligible. This section encourages you to develop and innovate new products and services, offering the financial freedom needed for future growth, stability, and continued innovation. By taking advantage of this incentive, you are also contributing to the strengthening of India's entrepreneurial ecosystem.
 

Meanwhile, if you want to start investing in mutual funds, Bajaj Finance Mutual Fund platform offers over 1,000 mutual fund schemes that you can take a look at. To choose the best suited ones based on your financial goals, use the mutual fund calculator available on the platform to compare mutual funds.