In a bid to foster the growth of startups in India and create a competitive environment for newly established businesses to thrive amidst the intense business landscape, the Government of India introduced Section 80-IAC in the Income Tax Act. Under the benefits of Section 80-IAC to startups, eligible startups are entitled to a deduction equivalent to 100 percent of their profits and gains. This initiative was launched with the aim of promoting entrepreneurship that generates employment opportunities. Section 80-IAC was initially enacted as part of the Finance Act of 2016 and subsequently amended in the Finance Bill of 2018.
This provision, known as Section 80-IAC, has been introduced to offer a valuable incentive to startups and support their early-stage growth. It allows for a 100 percent deduction on the profits and gains derived from eligible business activities for any three consecutive assessment years out of the five years beginning from the year in which the eligible startup was incorporated.
Understanding Section 80 IAC of the Income Tax Act
Section 80 IAC of the Income Tax Act 1961, similar to 12A and 80G registration, is a crucial provision that offers special tax benefits for specific businesses and is helpful for Startup India registration. This section, which was introduced on April 1, 2017, aims to promote honesty among young entrepreneurs in India by reducing tax evasion.
Tax Deductions under Section 80 IAC
Under Section 80IAC, eligible assesses who operate profitable businesses can enjoy a significant tax advantage. This provision allows them to claim a 100% tax deduction for a consecutive period of three years. This deduction is commonly known as the “80IAC deduction for eligible startups.”
Encouraging Honest Taxpayers
The primary objective of Section 80 IAC is to discourage tax evasion and foster a culture of tax compliance. By offering substantial tax incentives to eligible startups, this provision motivates aspiring entrepreneurs to contribute to the country’s economic growth while adhering to tax regulations.
Benefits of Section 80 IAC to Startups under the IT Act
The benefits of Section 80 IAC to startups have been mentioned below:
1. 100% Tax Deduction:
Eligible startups are entitled to claim a 100% tax deduction on their profits when computing their taxable income. This substantial deduction can significantly reduce the tax liability of startups and is one of the significant benefits of Section 80 IAC to startups.
2. Tax Exemption for Startups:
Under Section 80IAC, eligible startups can enjoy a tax exemption for three consecutive financial years. This exemption is granted within the first ten years following the startup’s incorporation or registration. It provides startups with valuable financial relief during their initial growth phase.
3. Reduced Tax Burden:
The deductions offered under Section 80 IAC help startups manage the heavy tax burden they often face in their early stages of operation. By reducing the taxable income, this provision eases the financial strain on startups, allowing them to allocate resources more efficiently.
4. Easy & Affordable to Claim:
Claiming deductions under Section 80 IAC is a straightforward process. Startups can file a simple online application without incurring any government fees. This ease of access simplifies the compliance process and encourages more startups to benefit from this tax exemption.
The benefits of Section 80 IAC to startups are many as it allows them to claim full tax deductions, reducing their tax burden, and offering a hassle-free application process. These benefits are instrumental in fostering the growth and sustainability of startups in India’s dynamic business environment.
Eligibility Criteria for Availing the Benefits of Section 80 IAC to Startups
To avail the benefits of Section 80 IAC to startups, it should be noted that not all DPIIT-recognised startups are eligible. To determine if you meet the criteria, consider the following points:
1. DPIIT Certificate: You must possess a DPIIT (Department for Promotion of Industry and Internal Trade) certificate.
2. Business Entity Type: The 80IAC tax exemption is exclusively available to Private Limited Companies or Limited Liability Partnerships (LLPs).
3. Incorporation Date: The entity must have been incorporated after April 1, 2016, to be eligible for this tax benefit.
4. Tax Deduction Period: You can claim tax deductions for any three consecutive years out of the first five years following incorporation.
5. Original Entity: The startup seeking the 80IAC tax exemption must be an original entity and not a result of a split or reconstruction of an existing business.
Meeting these criteria is essential to qualify for the benefits of Section 80IAC to startups.
Process of Claiming Benefits of Section 80 IAC to Startups
If you are eligible to claim a tax exemption under Section 80IAC of the Income Tax Act and want to avail the benefits of Section 80 IAC to startups, you can initiate the process by following these steps:
Step 1: Log in to Startup India Portal
1.1. Create a Startup India login account if you haven’t already.
1.2. Apply for a DPIIT (Department for Promotion of Industry and Internal Trade) recognition certificate through the Startup India registration process.
Step 2: Fill in the Details
2.1. After logging in to the Startup India portal, select the option to “Claim Tax Exemption.”
2.2. Fill in the required details in the provided form, including:
- Name of Startup
- Date of Incorporation
- Incorporation/Registration Number
- Address and Business Location
- Nature of Business
- DIPP (Department of Industrial Policy and Promotion) Number
- Contact Details (Phone Number, Email ID, and PAN Number of the entity)
Step 3: Submit Documents Required for 80IAC Tax Exemption
3.1. In addition to the above information, startups seeking 80IAC deductions must submit the following documents in PDF format:
- Memorandum of Association (if it’s a PLC)
- Limited Liability Partnership Deed (if it’s an LLP)
- Board Resolution (if applicable)
- CA (Chartered Accountant) certified Balance Sheet and Profit and Loss statements
- Financial Statements for either the past three years or for all the years since incorporation
- Income Tax Returns for either the past three years or from the date of incorporation
- Link to a video pitch of the startup
- Pitch Deck in PDF format
3.2. If your startup has received a certificate of angel tax exemption, provide the relevant details as well.
By following these steps and submitting the necessary documents, you can initiate the process to claim the 80IAC tax exemption and potentially enjoy the associated tax benefits for your startup.
Final Thoughts
The benefits of Section 80 IAC to startups are manifold as it offers invaluable support to emerging startups in India. With a 100% tax deduction on profits, a three-year tax exemption, and reduced initial tax burdens, this provision serves as a vital catalyst for the growth and success of new businesses. It not only incentivises entrepreneurship but also promotes tax compliance and honesty among young entrepreneurs. The ease of claiming deductions through a user-friendly online process without government fees further enhances its accessibility.
By alleviating financial pressures during the critical early years, the many benefits of Section 80 IAC to startups empowers them to invest in innovation, expansion, and job creation. Ultimately, this tax exemption plays a pivotal role in fostering a thriving startup ecosystem, driving economic development, and positioning India as a hub for entrepreneurial innovation.
