Section 80-IAC Startup Tax Deduction and Section 140 of Income Tax Act 2025

Eligible start-ups can claim a deduction of 100% of profits and gains derived from an eligible business for any three consecutive tax years out of ten years beginning with the year of incorporation, subject to the statutory conditions.

What is the start-up deduction?

Section 140 of the Income-tax Act, 2025 provides a profit-linked deduction for an assessee that is an eligible start-up. Where its gross total income includes profits and gains derived from an eligible business, 100% of those profits and gains may be deducted for three consecutive tax years. The start-up may choose any three consecutive tax years out of the ten-year period beginning with the year in which it is incorporated.

Under the earlier Income-tax Act, 1961, substantially the corresponding incentive was contained in Section 80-IAC. The Finance Act, 2025 extended the qualifying incorporation cut-off under Section 80-IAC from before 1 April 2025 to before 1 April 2030.

Who is an eligible start-up for this deduction?

For the tax deduction, the statutory definition is narrower than general DPIIT start-up recognition. In broad terms, the entity must satisfy all applicable conditions under Section 140, including the following:

• It must be a company or limited liability partnership (LLP).
• It must be incorporated on or after 1 April 2016 but before 1 April 2030.
• Its turnover must not exceed Rs. 100 crore for the tax year in which the deduction is claimed.
• It must hold the required certificate of eligible business from the Inter-Ministerial Board of Certification.
• Its eligible business must involve innovation, development or improvement of products, processes or services, or a scalable business model with high potential for employment generation or wealth creation.

Meaning of eligible business

An eligible business is a business carried on by an eligible start-up that is engaged in innovation, development or improvement of products, processes or services, or operates a scalable business model having high potential for employment generation or wealth creation.

Three consecutive tax years out of ten

The deduction is not automatically spread over the first three years. The assessee may choose a block of three consecutive tax years within the first ten years beginning from the year of incorporation. This choice can be commercially significant because the deduction is linked to profits and the turnover condition must be satisfied when the deduction is claimed.

Restrictions on formation of the start-up

The provision is intended for qualifying new businesses. The start-up must not be formed by splitting up or reconstruction of a business already in existence, subject to the statutory exception relating to re-establishment, reconstruction or revival in the circumstances covered by the corresponding provisions. It must also satisfy the restrictions concerning transfer of previously used machinery or plant.

Previously used machinery or plant

The law contains specific exceptions and deeming rules. Among them, machinery or plant previously used outside India may be treated differently where the prescribed conditions are fulfilled. The condition concerning previously used machinery or plant is also treated as satisfied where the value of such transferred machinery or plant does not exceed 20% of the total value of machinery or plant used in the business.

Certificate and DPIIT recognition

DPIIT recognition and eligibility for the income-tax profit deduction are related but are not identical tests. A start-up seeking the tax benefit must satisfy the tax provision and obtain the prescribed certification. The official Startup India portal provides the application facility for the income-tax exemption and explains the supporting-document requirements.

Audit report and Form 32 under the 2025 Act

For the current regime under the Income-tax Act, 2025 and Income-tax Rules, 2026, the Income Tax Department identifies Form 32 as the audit report used by an assessee claiming deductions including the eligible start-up deduction under Section 140. The form is to be verified by a Chartered Accountant and filed within the applicable statutory timeline.

Section 80-IAC and Section 140: what changed?

Important distinction from general DPIIT start-up recognition

The eligibility criteria used for general DPIIT recognition can differ from the conditions for the income-tax deduction. In particular, the Income Tax Department's current start-up guidance distinguishes the broader DPIIT recognition framework from the narrower tax-deduction requirements. A company or LLP claiming the profit deduction should therefore test eligibility specifically under Section 140 rather than relying only on its status as a recognised start-up.

How to check eligibility before claiming

1. Confirm that the entity is a company or LLP and falls within the statutory incorporation window.
2. Confirm that the activity meets the definition of eligible business.
3. Check the Rs. 100 crore turnover condition for the tax year in which deduction is proposed.
4. Verify compliance with the restrictions on reconstruction and previously used machinery or plant.
5. Obtain and retain the required Inter-Ministerial Board certification and related records.
6. Select a qualifying block of three consecutive tax years within the ten-year period.
7. Complete the applicable return, audit-report and prescribed-form requirements, including Form 32 where applicable under the current law.

Official resources

For current statutory text, forms and application procedures, use the official Income Tax Department and Startup India resources:

• Income Tax Department - Acts, Rules and official tax resources
• Startup India - 80-IAC income-tax exemption application
• Startup India - Inter-Ministerial Board and tax exemption information
• Startup India - recognition and tax exemption

Updated: 28 September 2026. This article is a general legal and tax information resource. Eligibility and compliance should be checked for the relevant tax year and facts of the particular start-up.