Benefits to Startups under Income Tax Act

What Is the Startup India Initiative? 

The Startup India campaign was formally launched by Prime Minister Narendra Modi on January 16, 2016, at Vigyan Bhawan, New Delhi with a clear goal of building India into a global startup powerhouse.

A decade on, that vision is taking shape. As of early 2026, over 2.23 lakh startups have been recognised by DPIIT, creating more than 21.9 lakh jobs and cementing India's position as the third-largest startup ecosystem in the world, with 123+ unicorns.

A key pillar of this initiative is providing meaningful tax incentives under the Income Tax Act to reduce the compliance burden on early-stage companies. From 2026-27 onwards, these benefits are consolidated under the Income Tax Act, 2025, which received Presidential assent on August 21, 2025, and came into force on April 1, 2026.

Is Your Entity a Startup?

Before claiming any tax benefit, your entity must qualify as a "Startup" as defined by the Department for Promotion of Industry and Internal Trade (DPIIT).

An entity is recognised as a startup if it meets the eligibility criteria as follows:

• Business Incorporation: Your business entity must be incorporated as a Private Limited Company, Partnership Firm, or LLP
• 10 Years Limit: Not more than 10 years have passed since the date of incorporation (extended to 20 years for deep-tech and biotech startups)
• Turnover Limit: Turnover has not exceeded ₹100 crore in any financial year since incorporation (extended to ₹300 crore for deep-tech startups)
• Business Motive: Is working towards innovation, development, or improvement of a product, process, or service, or has a scalable business model with high potential for employment generation or wealth creation
• Confirmation: Not formed by splitting up or reconstruction of an existing business

Founder Note: A trading or manufacturing company that is not innovating or scaling meaningfully may not qualify under DPIIT's definition, even if it's new and small. Deep-tech founders (AI, biotech, semiconductors) benefit from the expanded eligibility window.

How to Register with DPIIT?

To avail the benefits of Startup India Recognition, businesses need to register with DPIIT. Here's are the steps how businesses can get recognised under Startup India Recognisation:

Step 1: Apply online at Startup India Portal or through the Startup India mobile app.

Step 2: Submit the following documents:

• Certificate of Registration or Incorporation
• Write-up explaining how your entity is working towards innovation or has a scalable business model
• Supporting documents: website link, pitch deck, patent details (if any)
• Awards received by the entity (if any)
• Proof of funding received (if any)

Step 3: DPIIT will review the application and may request additional documents. They can reject applications with a stated reason.

Tax Benefits Under Income Tax Act (2026–27)

Once your startup is recognised by DPIIT, you can avail the following benefits under the Income Tax Act, 2025 (in force from April 1, 2026):

1. Angel Tax — Fully Abolished from April 1, 2025:

The Big News: Angel Tax No Longer Exists:

Section 56(2)(viib), the provision that taxed share premiums above Fair Market Value as "income from other sources" has been completely abolished by the Finance Act, 2024, with effect from April 1, 2025.

This is one of the most significant reforms for Indian startups in over a decade. For 12 years, Angel Tax created massive friction in early-stage fundraising, startups raising funds at valuations above their tax-assessed FMV faced income tax on the very capital they needed to grow. That is now gone.

What This Means for Your Startup Today?

• Any funding raised on or after April 1, 2025 is fully exempt, no conditions, no filing, no Form 2 required
• This applies to all investor categories, resident angels, foreign VCs, non-residents alike
• No DPIIT exemption paperwork is needed for new fundraising rounds

Important for Legacy Rounds (Pre-April 1, 2025)

If your startup raised funds before April 1, 2025 at a premium above FMV, those assessment years remain open. The tax department can still issue notices under the old law. If you've received or expect a notice for prior years, consult a tax advisor and retain all valuation reports, board resolutions, and investor documentation.

In Simple Terms: Angel Tax is dead. Raise your next funding round without worrying about the government taxing your share premium. But if you raised money before April 2025, check if you have any open assessments.

2. Tax Holiday — Section 80-IAC (Now Extended to March 31, 2030):

What Does It Mean?

An eligible startup can claim a 100% deduction on profits for any 3 consecutive years out of the first 10 years from incorporation, effectively paying zero income tax on business profits during those years.

As of April 2026, over 3,700 startups have been approved by the Inter-Ministerial Board (IMB) out of 2.07 lakh DPIIT-recognised startups, making this a narrow but highly valuable benefit.

How to Claim?

File Form 80-IAC on the Startup India portal to apply for the IMB Certificate of Eligible Business. Under the revised 2025 framework, complete applications are reviewed within 120 days.

Documents required

• Shareholding pattern (as per MoA and current structure)
• CA-certified audited financial statements (P&L and Balance Sheet) for all years since incorporation, or last 3 years
• Income Tax Returns for all years since incorporation (or last 3 years)
• Startup video (2–5 minutes describing innovation, business model, and impact)
• Board resolution authorising the 80-IAC application
• Declaration confirming non-reconstruction and non-transfer of old machinery

Eligibility Conditions (Updated for 2026):

1. Incorporated as a Private Limited Company or LLP (not a Partnership Firm or OPC)
2. Incorporated on or after April 1, 2016 and before March 31, 2030 (extended in Union Budget 2025-26)
3. Annual turnover does not exceed ₹100 crore in the financial year for which deduction is claimed (updated from earlier ₹25 crore limit)
4. Not formed by splitting up or reconstruction of an existing business
5. Not formed by transfer of previously used machinery or plant
6. Holds an IMB Certificate of Eligible Business
7. Engaged in innovation, development, or improvement of products/processes/services, or a scalable business model with high potential for employment generation or wealth creation

Important: MAT Still Applies: 

Even during the 80-IAC tax holiday, companies must pay Minimum Alternate Tax (MAT) at 15% on book profits. LLPs are exempt from AMT during the holiday period. MAT credit paid during the holiday years can be carried forward for 15 years.

Strategic Tip: Choose Your 3 Years Wisely: 

The most powerful aspect of 80-IAC is that you can choose which 3 consecutive years to claim within your first 10 years. Don't waste the deduction on early loss-making years. Elect the 3 years when your profits are highest.

In Simple Terms: 

If your startup is profitable and has an IMB certificate, you can pay zero income tax on business profits for any 3 consecutive years in your first decade. For a startup making ₹50 lakh profit annually, that's roughly ₹37–39 lakh saved over the holiday period.

3. Relaxed Carry Forward of Losses (Section 79):

The Problem Section 79 Solves

Normally, companies can only carry forward losses and set them off against future profits if there is continuity of 51% shareholding. This creates a problem for startups that dilute original shareholders through funding rounds, technically triggering disallowance of accumulated losses.

The Startup Relief (Finance Act No. 2, 2019 — continues under Income Tax Act, 2025)

For eligible startups, losses can be carried forward and set off if either of the following conditions is met:

• Continuity of 51% shareholding, or
• All original shareholders of the startup continue to hold at least one share

This means even if investors dilute early shareholders well below 51%, the startup retains its accumulated losses as long as the original founders remain on the cap table.

Founder Scenario: 

Your startup accumulated ₹80 lakh in losses in Years 1–2. In Year 3, a VC invests and dilutes original shareholders to 35%. Under normal Section 79, you'd lose those carry-forward losses. Under the startup relaxation, you retain them because original founders still hold shares. Plan cap table changes before each round closes, not after.

4. Capital Gains Exemption — Section 54GB:

Who Benefits?

Individual shareholders or HUFs (not the startup itself)

What It Covers:

Long-term capital gains arising from the transfer of a residential property, where the net consideration is invested in equity shares of an eligible startup.

Key Conditions:

• The seller must be an Individual or HUF
• Capital gains must arise from transfer of a long-term residential property
• Net consideration must be invested in equity shares of an eligible startup before the due date of filing the income tax return
• The startup must use the invested amount to purchase new plant and machinery within specified timelines

In Simple Terms: 

If a founder or investor sells their house and reinvests the proceeds into equity of a DPIIT-recognised startup, they can avoid paying long-term capital gains tax on that property sale, provided the startup deploys the capital into new business assets.

5. CBDT Startup Grievance Redressal Cell:

CBDT maintains a dedicated grievance cell for DPIIT-recognised startups under the Member of CBDT to help resolve income tax-related issues from assessment disputes to procedural clarifications.

Eligibility Comparison Under Each Tax Benefit

Founder Scenario Examples for Benefits Under Income Tax Act 

1. Scenario A: Angel Tax (Historical Context + What Changed): Rahul's SaaS startup raised ₹1 crore in angel funding in March 2024 at a premium over FMV. At the time, his DPIIT recognition and Form 2 filing protected him from Angel Tax. If Rahul raises his next round in 2026, he needs no such protection — Section 56(2)(viib) no longer exists. He can raise at any valuation without Angel Tax concerns.
2. Scenario B: 80-IAC Tax Holiday: Priya's edtech LLP was incorporated in August 2022 and turns profitable in FY 2025-26. She files Form 80-IAC on the Startup India portal and obtains the IMB certificate within 120 days. She strategically elects FY 2026-27, 2027-28, and 2028-29 as her 3 exempt years — paying zero income tax on profits during this period (MAT at 15% still applies to book profits).
3. Scenario C: Section 79 Loss Relief: An agritech startup with ₹50 lakh in accumulated losses raises a Series A in which VC investors take 68% equity. Original founders drop to 32%. Under normal Section 79, losses would be disallowed. Under the startup relaxation, since the original founders still hold shares, all ₹50 lakh in losses are preserved for set-off against future profits.
4. Scenario D: Section 54GB: Amit, a co-founder, sells his Delhi flat for ₹80 lakh (long-term capital gains of ₹30 lakh) and reinvests the full net consideration into equity shares of his DPIIT-recognised startup before filing his ITR. He avoids paying LTCG tax on the property sale, and the startup uses the funds to purchase new equipment.