Tax Exemptions for Indian Startups: Leveraging a 3-Year Window of Opportunity Within First Decade

Tejaswini P

How eligible startups can save tax and fuel early growth.

INTRODUCTION

In recent years, India’s startups ecosystem is one of the fastest growing in the world, and the government has initiated several policies with the objective of supporting new entrepreneurs. One such areas is the 3-year tax relief under Section 80-IAC which can be extremely advantageous for qualifying startups. In this post, we will take a closer look at who qualifies for the claim, the process of application, and how this benefit can be best utilized during the early stages of a startup’s growth.

For people who are completely clueless about this topic or for people who are simply interested in this topic, there is no need for worry as we will outline every single step in a clear and straightforward manner. So, let’s find out more about the income tax holidays given to DPIIT recognized startups.

WHAT IS A STARTUP?

A startup isn’t just a new company, it’s a company trying to solve real problem with fresh ideas, innovation, or technology.

In India, to be officially called a startup, your business needs to:

• Be less than 10 years old
• Have a turnover under ₹100 crore
• Be working on something innovative or scalable
• Be registered as a Private Ltd, LLP, or Partnership firm

Once recognized by DPIIT, your business officially becomes a startup eligible for benefits like tax exemptions and funding, valid until your recognition expires.

DPIIT RECOGNITION: THE GATEWAY TO STARTUP BENEFITS

To use the government benefits like tax exemptions under Section 80-IAC, a startup must first receive official recognition. This comes from DPIIT or the Department for Promotion of Industry and Internal Trade, which operates under the Ministry of Commerce and Industry, Government of India.

• What is DPIIT?

DPIIT is responsible for promoting industrial growth, encouraging entrepreneurship and  most importantly granting official recognition to startups.

To understand easily,

DPIIT certificate = Startup’s identity card

Without it = No access to key startup benefits

– Why is DPIIT Recognition Important?

Without DPIIT recognition, a business, even if newly started, is not considered a “startup” by the government. Which means it is not eligible for benefits like the 3-year income tax exemption under Section 80-IAC.

WHO CAN APPLY FOR DPIIT RECOGNITION?

Your business must meet the following eligibility criteria:

HOW TO APPLY FOR DPIIT RECOGNITION (WITH PORTAL & DOCUMENTS)

Where to Apply?

You need to apply on the Startup India Portal:
https://www.startupindia.gov.in

• Step-by-step process:

Register Your Startup on the Portal

• Go to the website linked above
• Click on “Register” (top right corner)
• Enter:

a. Your Name

b. Email ID

c. Mobile Number

d. Password

• You’ll receive an OTP to verify your email

2. Fill the DPIIT Recognition Form

• Once registered, login and navigate to:
  Get Recognized → DPIIT Recognition for Startups
• You’ll need to fill in the following sections:

–

3. Upload These Documents:

4. Submit the Form

• Recheck all filled details
• Click on Submit
• You’ll get an acknowledgment email

5. Wait for DPIIT Approval

• DPIIT will review your application
• If everything is in order, you’ll receive your DPIIT Certificate by email within 1–2 weeks

That’s it — your startup is now officially recognized by DPIIT, making it eligible for exclusive benefits like tax exemptions, funding access, IP support, and more.

WHAT IS “80-IAC” IN THE INDIAN INCOME TAX SECTION?

Eligible startups can claim a 100% zero income tax on their profits for any three consecutive years with ten years from incorporation, that 3year tax holiday is as per 80 IAC of the Income Tax Act, 1961. This greatly decreases the tax burden on startups so that profits can be reinvested for innovative growth.

The provision is a part of the “Action Plan for Startups” announced by the Government of India in 2016 with the objective to fuel entrepreneurship and employment generation.

WHAT ARE THE ELIGIBILITY REQUIREMENTS FOR CLAIMING 80-IAC?

Not all startups can avail this deduction. The following criteria must be fulfilled:

WHEN AND HOW TO CHOOSE THE 3-YEAR TAX WINDOW

The startups can choose any 3 consecutive years within the first 10 years of incorporation to claim the tax holiday. Ideally, the startup should:

• Wait until it becomes profitable.
• Consult a tax advisor to plan it alongside other exemptions (like Section 10AA or 10(38), if applicable).
• Remember that the choice is irreversible once exercised.

HOW TO CLAIM TAX EXEMPTION (SECTION 80-IAC)

Let’s look at the step-by-step process of how you can formally apply for the 3-year income tax exemption under Section 80-IAC through the Income Tax Department.

♦ Step-by-step process:

1. File Form-1 on the Startup India Portal

• Login to your Startup India account
• Navigate to: “Get Benefits” → “Section 80-IAC Tax Exemption”
• Fill in Form-1 and upload the required documents

2. Documents required:

3.  Submit to the Inter-Ministerial Board (IMB)

Once submitted, your application goes to the Inter-Ministerial Board (IMB) for evaluation.

They assess:

• Is your startup innovative and original?
• Is it scalable and capable of generating revenue?
• Are the documents and claims genuine?

4. Wait for IMB Approval

• The review process usually takes 4 to 8 weeks
• If approved, you’ll receive an official approval letter/email confirming your eligibility for the Section 80-IAC exemption

5. Claim the Tax Holiday

• You can choose any 3 consecutive years within 10 years of your incorporation
• For those 3 years, your startup will be exempt from paying income tax on profits (subject to conditions)

Quick Tip:

Even if your startup isn’t profitable in the early years, it’s good to apply early and get IMB approval.
You can activate the 3-year exemption later when profits begin — no need to wait until you’re earning.

EXAMPLE:

Now, let’s analyze the fictitious case of Finverse Solutions Pvt Ltd, a startup recognized in fiscal year 2021-22 for developing AI-driven software tools for personal finance.

It obtains DPIIT recognition in FY 2022-23.

It achieves profitability in FY 2023-24.

The founders opt to utilize the Section 80-IAC exemption for FY 2023-24, 2024-25, 2025-26.

Thus, the company doesn’t pay any income tax on profits for 3 years, enhancing available cash and increasing growth.

OTHER REGULATORY BENEFITS FOR STARTUPS (BEYOND 80-IAC)

1. Section 56(2)(viib): Angel Tax Exemption

–What is Angel tax exemption?

Any additional money raised from an investor by a startup over its fair market value is taxed as “income.” And this income is termed as angel tax.

-How does it help startups?

Startups recognized by the DPIIT are not subject to this tax.

As a result, they can raise angel investment without worrying about paying excessive taxes.

-How to make a claim:

Use the Startup India portal to complete the exemption request form.

The startup is prohibited from investing in “restricted assets” such as jewelry, real estate, etc.

2. Advantages of Intellectual Property Rights (IPR)

 Priority and savings for:

• Applications for patents: 80% fee reimbursement
• 50% off for trademark registrations

Processing is accelerated via a unique cell.

The significance helps new businesses swiftly and affordably safeguard their inventions.

3. Self-certification under Environmental 3 and Labor 9

Benefit:

DPIIT-recognized startups can self-certify compliance with certain laws like:

• Minimum Wages Act
• Factories Act
• Environment Protection Act (if applicable)

This reduces inspection pressure in the first 3-5 years.

COMMON PROBLEMS WITH STARTUPS 

Despite its advantages, Section 80-IAC is not used by many startups owing to

• Lack of Awareness– Many have no knowledge of the deduction or confuse it with other startup subsidies.
• Missed Timelines– DPIIT recognition delays or filing at the CBDT ex-post can lead to loss of chance.
• DocumentManagement– Errors in Form 1/other accompanying documents may lead to postponing or denying approved payment.
• Selecting Incorrect Years – The designated 3-year period, once selected, cannot be altered; poor strategic planning may eliminate potential advantages.

CONCLUSION

Now through this article, I hope you would have understood how the startups in India can benefit from the 3-year income tax exemption under 80-IAC. This section is a valuable support tool that can reduce financial burden and help business grow. By knowing all the advantages of these exemptions and by taking the right steps, your startup could be on the path to faster growth and long term success.

About the Author

Tejaswini is a B.Com graduate currently pursuing an MBA in Banking and Financial Services. With a keen interest in taxation, finance, and policy, she writes to simplify complex financial topics for students, entrepreneurs, and professionals.

Email: tejaswini01042004@gmail.com
LinkedIn: https://www.linkedin.com/in/tejaswini-p-308653278