Income tax for startups in India: exemptions, deductions and filing under section 80-IAC
Authored by - Souvik Das, Executive at Outsource360
A founder claims the startup tax holiday, reports a hundred per cent deduction of profits, files the return showing nil taxable income, and then receives a demand for tax anyway.
Nothing has gone wrong with the claim. The deduction was valid, the certificate was in order, the return was correct. What happened is that the deduction reduced total income and did nothing at all to book profit, and minimum alternate tax is charged on book profit. The holiday was never a holiday. It was a discount on one of two parallel tax computations, and the company was always going to pay the higher of them.
Until 31 March 2026 that outcome was survivable, because the minimum alternate tax you paid came back as a credit you could set off in later years. It was expensive in cash terms and neutral over the life of the company. The Finance Act, 2026 removed that credit. From 1 April 2026 the tax you pay under the minimum alternate tax provisions generates nothing to carry forward, which turns a timing difference into a permanent cost and quietly rewrites the arithmetic of the startup deduction.
Three other things moved at the same time, and together they mean that essentially every page currently ranking for this subject describes a statute that no longer exists.
The deduction is no longer in section 80-IAC. The Income-tax Act, 1961 was replaced by the Income-tax Act, 2025 on 1 April 2026, and the startup profit deduction now sits in section 140 of the new Act. The turnover ceiling is no longer Rs 100 crore. The Finance Act, 2026 tripled it to Rs 300 crore. And the alternate rate that founders reach for as the escape route, the flat twenty-two per cent regime, now lives in section 200 and carries a condition that most summaries omit: taking it forfeits the startup deduction permanently, in every future year, with no way back.
An eligible Indian startup can deduct 100 per cent of its profits for any three consecutive tax years out of ten years from incorporation, under section 140 of the Income-tax Act, 2025, which replaced section 80-IAC of the Income-tax Act, 1961 on 1 April 2026. The startup must be incorporated before 1 April 2030, have turnover of not more than Rs 300 crore in the tax year, and hold a certificate from the Inter-Ministerial Board. A company claiming the deduction still pays minimum alternate tax at 14 per cent of book profit, and from 1 April 2026 that tax no longer generates a carry-forward credit.
That is the position in one paragraph. What follows is where each piece of it comes from, what the deduction is actually worth once minimum alternate tax is taken into account, how the choice between the deduction and the twenty-two per cent regime should be made, and what a startup has to file and by when.
On this page
The section number changed, and so did two of the numbers inside it
Who actually qualifies, and the gate most recognised startups never pass
What the deduction is worth, and choosing the three years
The reason a tax holiday is not a holiday
The fork: section 140 or the twenty-two per cent regime
If the startup is an LLP, the numbers are different
The deductions that survive whichever branch you take
Losses, ESOPs, and the exemption that no longer exists
Filing: what a startup actually submits, and when
What it costs to get this wrong
Two boundaries are worth setting at the start. This article is about the tax computation and the return. It is not about how to obtain recognition or certification, which is a separate application process covered in full in DPIIT Startup India registration: benefits and how to qualify in 2026. And it is not about the general transition from the old Act to the new one, which is covered in the new Income-tax Act 2025 business compliance guide.
The section number changed, and so did two of the numbers inside it
Section numbers are the load-bearing part of tax writing, and on this subject they moved twice in eighteen months. Getting the mapping right is not pedantry. It decides whether the reader can find the provision at all.
Section 80-IAC is now section 140
The Income-tax Act, 2025 came into force on 1 April 2026, replacing the Income-tax Act, 1961. It renumbered every section in the statute. Tax year 2026-27 is the first year run under the new law, and the terms "previous year" and "assessment year" have been collapsed into a single "tax year".
The startup profit deduction that everyone knows as section 80-IAC is now section 140 of the Income-tax Act, 2025, sitting in Part C of Chapter VIII. Its marginal heading is "Special provision in respect of specified business".
The old number has not stopped mattering, and this is where most current writing goes wrong in a way that misleads rather than merely dates. Assessments, appeals and rectifications for years up to and including 2025-26 still run under the 1961 Act. A startup in its third deduction year in September 2026 has claims live under both statutes at once. So the number alone is never enough. Every reference has to carry its Act.
That discipline matters more here than on most subjects, because the renumbering was not a clean shift. Some numbers were reused for entirely different provisions. Section 79 of the 1961 Act governed the carry-forward of losses on a change in shareholding, which is directly relevant to a startup taking investment. Section 79 of the Income-tax Act, 2025 is about the transfer of unquoted shares below fair value, which is a different subject with different consequences. Written without its Act, "section 79" now points a reader at the opposite of what the writer meant.
What the Finance Act, 2026 changed inside the section
Two figures inside the startup provisions moved on 1 April 2026, and both moved in the taxpayer's favour on the surface.
The turnover ceiling tripled. Section 140(16)(b)(ii) of the Income-tax Act, 2025 sets the limit at three hundred crore rupees, and the amendment footnote on the Central Board of Direct Taxes text records the substitution plainly: the word "one" was replaced by "three" by Act No. 4 of 2026, with effect from 1 April 2026. Act No. 4 of 2026 is the Finance Act, 2026. Any page still stating Rs 100 crore is quoting the position as it stood before the current tax year began.
The minimum alternate tax rate fell, from fifteen per cent to fourteen. Section 206(1)(b)(ii) now reads fourteen per cent for a company other than a unit in an International Financial Services Centre, and its footnote records the substitution for "15%" by the same Finance Act, with effect from the same date.
The second change is smaller than it looks, because of a third change in the same Act that no summary of the rate cut mentions. That is the subject of a later section, and it is the single most consequential thing that happened to the startup deduction this year.
The mapping, old number to new
Here are the provisions a startup founder is most likely to look up, in both statutes.
Subject | Income-tax Act, 1961 | Income-tax Act, 2025 |
Startup profit deduction | Section 80-IAC | Section 140 |
Minimum alternate tax and alternate minimum tax | Sections 115JB and 115JC | Section 206 |
Concessional 22 per cent company rate | Section 115BAA | Section 200 |
Additional employee cost deduction | Section 80JJAA | Section 146 |
Inter-corporate dividend deduction | Section 80M | Section 148 |
Carry-forward of losses on change in shareholding | Section 79 | Section 119 |
Unexplained credits | Section 68 | Section 102 |
Tax on unexplained income | Section 115BBE | Section 195 |
Return of income and due dates | Section 139 | Section 263 |
Employer withholding on ESOP perquisite | Section 192(1C) | Section 392(3) |
Angel tax on share premium | Section 56(2)(viib) | No successor provision |
Two rows in that table deserve a second look. Section 195 of the 1961 Act was withholding on payments to non-residents, a provision almost every startup with an overseas contractor has met. Section 195 of the Income-tax Act, 2025 is the charge on unexplained income at thirty per cent. And angel tax has no successor at all, which is dealt with later in this article.
Who actually qualifies, and the gate most recognised startups never pass
Eligibility for the deduction is narrower than eligibility for recognition, and the gap between the two is the reason most founders who believe they have a tax holiday do not.
Recognition is not certification
Section 140(16)(b) of the Income-tax Act, 2025 sets three conditions for an eligible startup, and the third is the one that filters almost everyone out.
The entity must be incorporated on or after 1 April 2016 but before 1 April 2030. Its total turnover must not exceed three hundred crore rupees in the tax year. And it must hold a certificate of eligible business from the Inter-Ministerial Board.
That certificate is a separate application, decided by a separate body, on a separate test from the one that produces recognition under the Startup India framework. Recognition by the Department for Promotion of Industry and Internal Trade does not grant it and does not imply it. A startup can hold a recognition certificate for years, describe itself accurately as a recognised startup, and have no entitlement to the deduction whatsoever.
The numbers on this are stark. Against more than two lakh recognised entities, the count of startups granted the tax benefit has been in the low thousands. The mechanics of that second application, what the Board looks for, and why applications are refused are covered in the DPIIT recognition guide. What matters for the return is simply this: without the Board's certificate, there is no deduction to claim, and claiming one is a disclosure problem rather than an optimistic position.
The conditions inside the section that have nothing to do with recognition
Beyond the three headline conditions, section 140 carries its own structural tests, and these are assessed by the Assessing Officer rather than by any board.
Section 140(3) requires that the startup is not formed by splitting up or reconstructing a business already in existence, and that it is not formed by transferring to a new business machinery or plant previously used for any purpose. Both limbs catch the same commercial pattern: an established business repackaged as a new entity to reset the clock.
The second limb is softer than it reads. Section 140(6) provides that where previously used plant or machinery is transferred in, and its total value does not exceed twenty per cent of the total value of plant and machinery used in the business, the condition is treated as satisfied. So a startup that brings in some second-hand equipment is not automatically disqualified. It has a twenty per cent allowance.
There is also a carve-out for imported second-hand machinery. Under section 140(5), plant or machinery used outside India by someone other than the assessee is not treated as previously used, provided it was never used in India before installation, it is imported, and no depreciation on it has been allowed to anyone in India for any earlier period. A startup importing used equipment from an overseas parent can stay inside the section if those three conditions hold.
And section 140(4) preserves eligibility where a business is discontinued because of flood, cyclone, earthquake, riot, civil disturbance, accidental fire, explosion or enemy action, and is re-established within three years from the end of that tax year. The reconstruction bar in section 140(3)(a) does not apply to a business revived in those circumstances.
The anti-abuse provisions that apply after you qualify
Three provisions inside section 140 exist to stop profit being moved into the deduction from somewhere it does not belong. They are worth knowing because they bite on ordinary group structures, not just on aggressive ones.
Section 140(9) applies where goods or services are transferred between the eligible business and any other business carried on by the same assessee, and the consideration recorded does not correspond to market value. The profits of the eligible business are then recomputed as if the transfer had been made at market value. Section 140(11) defines market value as the price the goods or services would ordinarily fetch in the open market, or the arm's length price where the transfer is a specified domestic transaction.
Section 140(13) is broader. Where a close connection between the startup and another person means the business between them produces more than the ordinary profits that might be expected, the Assessing Officer may substitute the amount of profit reasonably deemed to have been derived. This is the provision that catches a group arrangement routing margin into the entity that happens to be enjoying the deduction.
Section 140(7) is not an anti-abuse rule but has the same practical effect on the arithmetic. For determining the deduction in the second and later years, the eligible business is computed as if it were the only source of income of the assessee, from the initial year onwards. Losses of the eligible business from earlier years are therefore absorbed against its own profits before any deduction is worked out. A startup that lost money for four years and turned profitable in the fifth cannot deduct that fifth-year profit while separately carrying its earlier losses elsewhere.
What the deduction is worth, and choosing the three years
The mechanics are simple. The timing decision inside them is not, and it is the one genuinely valuable planning choice a startup gets here.
One hundred per cent, three years, chosen out of ten
Section 140(1) allows a deduction of an amount equal to one hundred per cent of the profits and gains derived from the eligible business, for three consecutive tax years. Section 140(2) lets the assessee choose which three, out of ten years beginning with the year of incorporation.
Three points follow from the drafting, and each is missed somewhere on page one of the search results.
The three years must be consecutive. This is not three years of the startup's choosing scattered across a decade. Once the first claimed year is fixed, the next two follow immediately, whether or not they are profitable.
The deduction runs on profits of the eligible business, not on total income. Interest income, rental income and capital gains sit outside it. A startup with substantial treasury income from its last round will find a meaningful part of its profit unsheltered.
And the ten-year window runs from incorporation, not from recognition, not from certification, and not from the first profitable year. A startup incorporated in 2018 that becomes profitable in 2027 has one year of the window left.
Why the choice of years is the whole game
Because the three years are consecutive and the deduction only shelters profit, a startup that elects too early spends its holiday on years with little or no profit to shelter.
Consider the ordinary shape of a venture-funded company. Losses through the early years, a first small profit, then a step up as the model reaches scale. Electing in the first profitable year uses year one of three on a small number. Waiting two more years spends the same three-year entitlement on materially larger profits.
The counterweight is the ten-year outer limit and the incorporation cut-off. Waiting is only free while there is still runway in the window. A company incorporated in March 2022 has to start its three consecutive years no later than tax year 2029-30 to use all three inside the ten-year period.
We often see this decided by default rather than by decision, with the claim made in the first year it is technically available because that is what the software offered. On a company that goes from Rs 40 lakh of profit to Rs 6 crore over three years, the difference between electing at the first opportunity and electing two years later is not marginal.
The deduction is capped by the profits it shelters
Section 140(12) provides that where profits are claimed and allowed under section 140, no deduction to the extent of those profits is allowed under any other provision of Part C of Chapter VIII, and in no case can the total exceed the profits and gains of the eligible business.
That is a no-double-dipping rule and a ceiling in one sentence. The deduction cannot create or increase a loss. It reduces the profit of the eligible business to nil and stops there.
The reason a tax holiday is not a holiday
This is the section that changes the answer for most companies, and it turns on a provision that has nothing to do with startups at all.
Minimum alternate tax is computed on book profit, which the deduction never touches
Section 206(1)(a) of the Income-tax Act, 2025 provides that where the income-tax payable by a company on its total income is less than the minimum alternate tax payable for that tax year, the book profit is deemed to be the total income and the company pays tax equal to the minimum alternate tax.
Book profit is defined in section 206(1)(c) as the profit shown in the statement of profit and loss, adjusted by a long list of items: income-tax debited, amounts carried to reserves, provisions for unascertained liabilities, provisions for losses of subsidiaries, proposed dividends, depreciation, deferred tax, provisions for diminution in the value of assets, and others, with corresponding reductions.
The section 140 deduction appears nowhere in that list, because it is not an accounting item. It is a deduction in computing total income under the Act. The profit in the statement of profit and loss is unaffected by it.
So a certified startup with Rs 5 crore of accounting profit and a full section 140 claim has a normal tax computation producing nil, and a minimum alternate tax computation producing fourteen per cent of Rs 5 crore, plus applicable surcharge and cess. Section 206(1)(a) then makes the higher of the two payable. The company pays.
The change that turned a deferral into a cost
Under the old law this was uncomfortable rather than expensive. Minimum alternate tax paid in excess of normal tax became a credit, carried forward for up to fifteen years and set off in any year when normal tax exceeded the minimum. A startup paid early and recovered later. Over the life of a successful company the whole thing washed out.
The Finance Act, 2026 removed the credit. Clauses (m), (n), (o) and (p) of section 206(1), which created the credit, governed its computation, provided for its carry-forward to the fifteenth tax year and adjusted it on appeal, were omitted with effect from 1 April 2026. The amendment footnotes on the Central Board of Direct Taxes text set out the omitted clauses in full, which is how their absence can be read as deliberate rather than as a gap.
What remains is transitional. Section 206(3) and section 206(4), substituted by the same Finance Act, deal only with credit already accumulated under section 115JAA of the Income-tax Act, 1961 as at 31 March 2026. For a domestic company that has exercised the option under section 200(5) or section 201(2), that legacy credit can be set off up to twenty-five per cent of the tax payable in a year, with the balance carried forward, and never beyond the fifteenth tax year from when it first became allowable. Section 206(4) makes parallel provision for a foreign company.
The consequence for a startup claiming the deduction from tax year 2026-27 onwards is direct. Minimum alternate tax paid is now a final cost. There is nothing to carry forward and nothing to recover. The startup deduction has become a mechanism that reduces the rate on sheltered profits from the full corporate rate to fourteen per cent, rather than to nil.
There is a second and stranger consequence, and it should be flagged as an open question rather than stated as settled. Section 206(3) is expressed to apply only to a domestic company that has exercised the option under section 200(5) or section 201(2). A domestic company that stays in the ordinary regime, and holds legacy credit from before 1 April 2026, has no clause that provides for setting it off, because the general credit clauses have been omitted. On the face of the text that credit has nowhere to go. Whether that is the intended effect or a drafting consequence to be corrected is not something the enacted text answers, and a company sitting on material accumulated credit should be taking advice on it rather than assumptions.
The arithmetic, stated plainly
For a certified startup company with profitable operations in tax year 2026-27, on Rs 5 crore of accounting profit that is also its eligible business profit.
Position | Basis of charge | Rate before surcharge and cess | Credit for the tax paid |
Section 140 claimed, ordinary regime | Book profit, under section 206 | 14 per cent | None, from 1 April 2026 |
No section 140 claim, ordinary regime | Total income, at the ordinary company rate | Ordinary rate applicable to the company | Not applicable |
Option under section 200 exercised | Total income, section 200 | 22 per cent | Minimum alternate tax does not apply |
Section 140 claimed by an LLP | Adjusted total income, under section 206(2) | 18.5 per cent | Credit survives, up to 15 tax years |
The row that surprises founders is the last one, and it is dealt with below.
The fork: section 140 or the twenty-two per cent regime
For a company, the startup deduction and the concessional rate regime are mutually exclusive. Choosing between them is the central tax decision a profitable Indian startup makes, and one side of it is irreversible.
What section 200 offers, and what it costs
Section 200(1) of the Income-tax Act, 2025 allows a domestic company to opt for income-tax at twenty-two per cent, provided its total income is computed without a specified list of deductions.
The exclusion that matters is section 200(1)(a)(ii): the total income must be computed without any deduction under Chapter VIII, other than the provisions of section 146 or section 148. Section 140 is in Chapter VIII, Part C. It is not section 146 and it is not section 148. So exercising the option forfeits the startup deduction.
The trade going the other way is that section 206(1)(q)(ii) disapplies the minimum alternate tax provisions to a person who has exercised the option under section 200(5) or section 201(2). A company inside the twenty-two per cent regime does not compute book profit and does not pay minimum alternate tax at all.
So the fork is genuine, and both branches lead somewhere reasonable. Claim section 140 and pay fourteen per cent of book profit with no credit. Take section 200 and pay twenty-two per cent of total income with no minimum alternate tax and no startup deduction, ever.
The option is irrevocable, and that is the part to think hardest about
Section 200(6) provides that once the option has been exercised for any tax year, it cannot subsequently be withdrawn for the same or any other tax year.
Read that as written. It is not an annual election. A company that opts in for tax year 2026-27 because it has no certificate and no deduction to lose has, by that act, given up the section 140 deduction for every year of its life, including the years after the Inter-Ministerial Board grants a certificate it applied for later.
This is a live trap rather than a theoretical one, because the order of events is naturally wrong. Board certification takes time. The twenty-two per cent option is exercised at return-filing, which is a routine act performed by a tax preparer. A startup whose certificate application is pending in October can very easily have the option exercised on its behalf, and discover the following year that the certificate it has just been granted is worth nothing to it.
Two further mechanics are worth holding. Section 200(5) requires the option to be exercised in the prescribed manner on or before the due date under section 263(1) for furnishing the return, and once exercised it applies to subsequent tax years. Section 200(2) provides that if the company fails to satisfy the requirements in any tax year, the option becomes invalid for that year and for subsequent years, and the Act applies as if it had never been exercised.
Which branch wins
The comparison is between fourteen per cent of book profit and twenty-two per cent of total income, and it does not resolve to a single answer because the two bases are different.
Where book profit and taxable profit are close, section 140 wins on the arithmetic while the deduction is running. Fourteen is less than twenty-two. But the deduction runs for three years and the option runs forever, so a company with a long profitable life ahead of it is comparing three years of an eight-point saving against every subsequent year at the ordinary rate rather than at twenty-two per cent.
Where book profit substantially exceeds taxable profit, which is the ordinary case for a company with large accounting depreciation, provisions or share-based payment charges, fourteen per cent of the larger number can exceed twenty-two per cent of the smaller one. The deduction is then worth less than nothing relative to the alternative.
And where the startup has no Board certificate, there is no fork. There is only section 200 against the ordinary rate, and the calculation is the same one every other domestic company makes.
The honest summary is that this is a modelling question over the company's whole projected life, not a decision that can be made from a rate table, and it has to be made before the first return in which the option could be exercised, because of section 200(6). It is precisely the sort of decision that a lean finance team makes badly under filing-deadline pressure.
If the startup is an LLP, the numbers are different
A limited liability partnership can be an eligible startup and can claim the section 140 deduction. It faces a different minimum tax provision, at a higher rate, with no small-entity threshold, and better credit treatment. Every one of those four differences runs the opposite way to what founders expect.
Alternate minimum tax at 18.5 per cent
Section 206(2)(a) applies where the regular income-tax payable by a person other than a company is less than the alternate minimum tax. The adjusted total income is then deemed to be total income.
Section 206(2)(b)(i) defines adjusted total income as total income increased by deductions claimed under any section, other than section 149, included in Chapter VIII-C, plus deductions under section 46 as reduced by depreciation. Section 140 sits in Part C of Chapter VIII, which is what the drafting refers to as Chapter VIII-C. So the section 140 deduction is added straight back.
The rate under section 206(2)(b)(ii)(III) is eighteen and a half per cent in the general case, against fourteen per cent for a company. A unit in an International Financial Services Centre earning solely in convertible foreign exchange pays nine per cent, and a co-operative society fifteen.
So an LLP claiming the startup deduction pays a higher minimum rate than a company claiming the same deduction on the same profits. The gap is four and a half percentage points, and it exists purely because of entity form.
There is no threshold for an LLP
Section 206(2)(d)(iii) exempts a person from the alternate minimum tax where adjusted total income does not exceed twenty lakh rupees. That exemption is confined by its own words to an individual, a Hindu undivided family, an association of persons, a body of individuals whether incorporated or not, and an artificial juridical person.
A firm is not in that list, and an LLP is taxed as a firm. So the twenty lakh floor that protects small non-corporate taxpayers does not protect an LLP at all. An LLP claiming a section 140 deduction on Rs 8 lakh of profit is inside the alternate minimum tax provisions on the first rupee.
Section 206(2)(d) also disapplies the provisions to a person who has exercised the option under section 203(5) or section 204(2), which are the concessional regimes available to non-corporate taxpayers, and to a person whose tax is computed under section 202(1).
The one respect in which an LLP is better off
The Finance Act, 2026 omitted the minimum alternate tax credit for companies. It left the alternate minimum tax credit for non-corporates intact.
Section 206(2)(e) provides that where tax is paid under the alternate minimum tax provisions, credit is allowed of the excess of that tax over the regular income-tax for the year. Section 206(2)(g) carries the credit forward, to be set off in a year when regular income-tax exceeds the alternate minimum tax, to the extent of that excess, and not beyond the fifteenth tax year following the year in which the credit became allowable. Section 206(2)(f) confirms that no interest is payable on the credit.
That is the asymmetry, and it is the sort of thing that only shows up if you read both sub-sections of the same section. From 1 April 2026, an LLP paying alternate minimum tax on a startup deduction is making a prepayment it can recover. A company paying minimum alternate tax on the same deduction is making a payment it cannot. The company pays a lower rate and keeps none of it. The LLP pays a higher rate and keeps the excess as a credit.
Whether that makes an LLP the better vehicle depends on far more than this one provision, and entity choice is dealt with separately in private limited versus LLP versus OPC. What is worth saying here is that the standard advice, which is that an LLP is the worse vehicle for a startup claiming the tax holiday, is now only half right.
The deductions that survive whichever branch you take
Section 200 forfeits Chapter VIII deductions with two exceptions, and both exceptions are useful to a growing company. They are also the two that startup tax writing consistently ignores, because they are not headline benefits.
Section 146, additional employee cost
Section 146 of the Income-tax Act, 2025 is the successor to section 80JJAA of the 1961 Act. It allows a deduction referable to additional employee cost, for a business whose accounts are audited, and it is expressly preserved under the twenty-two per cent regime by section 200(1)(a)(ii).
For a company that is hiring hard, this is the deduction that keeps working after the startup holiday has been spent or forfeited. It is not restricted to certified startups, it does not need a Board certificate, and it does not expire ten years after incorporation. Its conditions are specific and its computation is mechanical, which is exactly why it tends to be missed by companies without a dedicated tax function rather than deliberately declined.
Section 148, inter-corporate dividends
Section 148 is the successor to section 80M, and allows a domestic company a deduction for dividends received from another domestic company, a foreign company or a business trust, to the extent it distributes dividends of its own. It is also preserved under section 200.
Most single-entity startups never touch it. It becomes relevant the moment a holding structure appears, which for an Indian startup is usually at the point of a foreign subsidiary or a group reorganisation before a larger round.
What does not survive
Everything else in Chapter VIII goes if the section 200 option is exercised, and section 200(1)(b) and (c) go further. Carried-forward loss and unabsorbed depreciation attributable to any of the excluded deductions cannot be set off, and section 200(3) deems that loss and depreciation to have been given full effect, so no further deduction is ever allowed for it.
That is a real cost for a company sitting on accumulated losses attributable to excluded deductions, and it has to go into the model alongside the rate comparison.
Losses, ESOPs, and the exemption that no longer exists
Three further provisions shape a startup's tax position, and two of them are startup-specific in a way the deduction is not.
Carrying losses through a funding round
Section 119 of the Income-tax Act, 2025, which replaced section 79 of the 1961 Act, restricts the carry-forward of losses where the shareholding of a closely held company changes.
The general test in section 119(3)(a) requires continuity of fifty-one per cent of beneficial voting power between the loss year and the year of set-off. A funding round of any size fails it eventually.
Section 119(3)(b) provides the startup relaxation, and it is drafted as an alternative rather than a replacement. For an eligible startup referred to in section 140, the loss can be carried forward regardless of the change in percentage, provided all shareholders who held voting shares on the last day of the loss year continue to hold those shares on the last day of the year of set-off, and the loss was incurred within ten years from incorporation.
The word doing the work is "all". The general test asks whether fifty-one per cent stayed. The startup test asks whether everyone stayed. A single angel selling out entirely in a secondary breaks it, even though the round left the founders in control. A startup that fails the startup limb can still fall back on the general fifty-one per cent limb, which is why the two should be tested in that order rather than treated as one rule.
Note the cross-reference. Section 119(3)(b) is available to an eligible startup "referred to in section 140", which imports the Board certificate requirement. The loss relaxation is therefore confined to certified startups in the same way the deduction is. The interaction between a round and the cap table is covered in the funding round compliance checklist.
ESOP tax deferral, and who actually gets it
An employee stock option is taxed as a perquisite at exercise, under section 17(1)(d) of the Income-tax Act, 2025, on the value of the specified security allotted free of cost or at a concessional rate. The employee owes tax on a gain that is not cash and may not be saleable.
Section 392(3) allows an eligible startup referred to in section 140 to defer the withholding on that perquisite, paying at the rates in force for the tax year of allotment but within the time specified in section 289(3). Section 289(3) sets that time at fourteen days after the earliest of three events: the expiry of sixty months from the end of the relevant tax year, the date of sale of the security, or the date the employee ceases to be an employee of the allotting employer.
Two things about that are commonly stated wrongly. The window is sixty months from the end of the relevant tax year, not forty-eight, and not five years from exercise. And the deferral is available only to an eligible startup referred to in section 140, which again means a Board-certified startup, not merely a recognised one.
That last point is worth stating baldly, because the ESOP deferral is offered in a great deal of founder-facing material as a benefit of being a recognised startup. It is not. It runs through the same certificate as the deduction, and the same small minority of companies qualify.
Angel tax is gone, and there is nothing in its place
Section 56(2)(viib) of the Income-tax Act, 1961 taxed share premium received by a closely held company above fair market value. It stopped applying from assessment year 2025-26.
The Income-tax Act, 2025 contains no successor. The general charging provision for income from other sources carries no charge on share premium received on a fresh issue of shares. So a startup raising at a high valuation in tax year 2026-27 has no angel tax exposure, and no reason to seek an exemption from it.
One drafting nuance matters for anyone with an open assessment. The clause was not deleted. A proviso was inserted switching it off prospectively, so the clause survives on the statute book for earlier years and open assessments for assessment years 2023-24 and 2024-25 continue under the old law.
The live risk on money coming into a startup is now elsewhere. Section 102 of the Income-tax Act, 2025 taxes unexplained credits, and section 102(3) carries forward the rule that where the credit is share application money, share capital or share premium in a closely held company, the explanation is treated as unsatisfactory unless the resident investor also explains its own source. Tax on that income falls under section 195 of the Income-tax Act, 2025 at thirty per cent, reduced from sixty by the Finance Act, 2026, and section 195(2) allows no deduction for expenditure and no set-off of any loss against it. A loss-making startup cannot shelter such an addition with its accumulated losses.
Filing: what a startup actually submits, and when
The compliance around the deduction is thin, but two of its four elements are conditions of the claim rather than administrative steps, which means missing them costs the deduction rather than a late fee.
The audit report is a condition of the deduction
Section 140(8) provides that the deduction is not admissible unless the accounts of the eligible business for the tax year have been audited by an accountant before the specified date referred to in section 63, and the assessee furnishes by that date the report of the audit in the prescribed form, duly signed and verified.
The construction is important. This is not a procedural requirement whose breach attracts a penalty. The words are that the deduction "shall not be admissible unless". A report furnished after the specified date puts the claim itself at risk.
This sits separately from, and in addition to, any statutory audit under company law and any tax audit obligation the startup has in its own right.
Form numbers changed, and this is where to be careful
The Income-tax Rules, 2026 were notified alongside the new Act and consolidated the form set substantially, reducing the number of prescribed forms by more than half. The report under section 140(8) is required in "the prescribed form", and the prescribed form is the one specified under the 2026 Rules, not the form number that applied under the 1961 Act and its rules.
This article does not give that form number, deliberately. The rule and form numbering under the Income-tax Rules, 2026 could not be verified against the Board's own published rules text at the date of writing, and a wrong form number in a filing article is worse than no form number. Confirm the current form on the e-filing portal or with the accountant signing the report before the specified date, and treat any form number quoted in older material as belonging to the previous rule set.
Return due dates for tax year 2026-27
Section 263(1) of the Income-tax Act, 2025 requires every company and every firm to furnish a return of income for a tax year, on or before the due date, regardless of income. There is no threshold for either. A startup with no revenue still files.
The due dates are set out in the Table to section 263(1), by reference to the financial year succeeding the relevant tax year.
Person | Due date |
Assessee required to furnish a transfer pricing report under section 172 | 30 November |
Company, in cases other than the above | 31 October |
Person other than a company whose accounts require audit under any law | 31 October |
Partner of a firm whose accounts require audit, and certain spouses | 31 October |
Any other assessee | 31 July |
For a startup company, the working date is 31 October. For an LLP, it is 31 October where its accounts require audit and 31 July where they do not, which makes the audit threshold a filing-date question as well as an audit question.
The date matters twice over. It is the return deadline, and it is the outer limit for exercising the section 200 option, because section 200(5) requires the option to be exercised on or before the due date specified under section 263(1).
The sequence, in the order it has to run
For a certified startup company claiming the deduction for tax year 2026-27.
Close the books and finalise the statement of profit and loss, because book profit under section 206 comes from it directly and cannot be worked out from the tax computation.
Compute total income with the section 140 deduction, and separately compute book profit under section 206(1)(c). Both numbers are needed before either return position can be settled.
Decide the section 200 question, if it is still open. It cannot be revisited after the option is exercised, and it must be exercised by the due date.
Obtain the audit report on the eligible business under section 140(8), in the prescribed form, before the specified date referred to in section 63.
Furnish that report by the specified date. The deduction is not admissible unless this happens.
File the return by 31 October, disclosing the deduction and the minimum alternate tax computation.
Steps two and three are the ones that get compressed. A company that starts modelling the section 200 decision in the last week of October is making a permanent choice on incomplete numbers.
If running two parallel tax computations and a once-only regime election alongside everything else is more than a lean finance team can carry in October, Outsource360 handles startup tax registration and compliance, with tax advisory for the section 200 modelling and virtual CFO support for the numbers underneath it. Book a consultation if it would help to talk it through.
What it costs to get this wrong
The penalties are not the expensive part. Three of the four common failures here cannot be cured by paying anything.
A late audit report under section 140(8) costs the deduction for that year, because admissibility is conditioned on it. There is no fee that restores it.
An option exercised under section 200 before the certificate arrives costs the deduction for every year, because section 200(6) makes the option irrevocable. This is the most expensive mistake available on this subject and the easiest to make, because it happens through inaction at a filing deadline rather than through a decision.
A deduction claimed without a Board certificate is a disclosure problem, not an aggressive position, and it will not survive processing.
And a startup that models the deduction as producing nil tax, rather than as producing tax at fourteen per cent of book profit with no credit, will have budgeted a cash outflow at zero that is not zero. On Rs 5 crore of book profit that is a seven-figure difference in a year when the company is most likely to be planning around runway.
The ordinary annual filings sit underneath all of this and do not move. They are set out in the annual ROC compliance calendar and, for a company in its first year, in the first-year founder's checklist.
Frequently asked questions
Is section 80-IAC still available in 2026?
The deduction is still available, but not under that number. Section 80-IAC of the Income-tax Act, 1961 was replaced by section 140 of the Income-tax Act, 2025 when the new Act came into force on 1 April 2026. The benefit is the same in substance: one hundred per cent of the profits of an eligible business for three consecutive tax years, chosen out of ten years from incorporation. Claims for years up to 2025-26 continue to be dealt with under the old section.
What is the turnover limit for the startup tax exemption?
Three hundred crore rupees in the tax year. Section 140(16)(b)(ii) of the Income-tax Act, 2025 set the limit at one hundred crore as enacted, and the Finance Act, 2026 substituted three hundred with effect from 1 April 2026. Pages still quoting Rs 100 crore are describing the position before the current tax year.
Does DPIIT recognition give me the tax holiday?
No. Recognition and the tax deduction are separate. Section 140(16)(b)(iii) requires a certificate of eligible business from the Inter-Ministerial Board, which is a second application decided by a different body on a different test. A recognised startup without that certificate has no entitlement to the deduction, and the great majority of recognised startups do not hold one.
Do I still pay tax if I claim the startup deduction?
Usually yes, if you are a company. The deduction reduces total income but not book profit, and section 206 of the Income-tax Act, 2025 charges minimum alternate tax on book profit where it exceeds the tax on total income. The rate is fourteen per cent, plus applicable surcharge and cess. So a full deduction typically converts the effective charge to fourteen per cent of book profit rather than to nil.
What is the MAT rate for a company in 2026-27?
Fourteen per cent of book profit for a company other than a unit in an International Financial Services Centre, which pays nine. Section 206(1)(b)(ii) of the Income-tax Act, 2025 was amended by the Finance Act, 2026, substituting fourteen per cent for fifteen with effect from 1 April 2026. A great deal of current material still states fifteen.
Can I still carry forward MAT credit?
Not on tax paid from 1 April 2026. The Finance Act, 2026 omitted the clauses of section 206(1) that created the credit and provided for its carry-forward. Sections 206(3) and 206(4) now deal only with credit accumulated under section 115JAA of the Income-tax Act, 1961 up to 31 March 2026, and section 206(3) is expressed to apply only to a domestic company that has exercised the option under section 200(5) or section 201(2). Minimum alternate tax paid going forward is a final cost rather than a prepayment.
Should I opt for the 22 per cent tax regime or claim section 80-IAC?
They are mutually exclusive, and the choice is permanent in one direction. Section 200(1)(a)(ii) of the Income-tax Act, 2025 computes the twenty-two per cent regime without any Chapter VIII deduction other than sections 146 and 148, which excludes section 140. In exchange, section 206(1)(q)(ii) disapplies minimum alternate tax entirely. The comparison is between fourteen per cent of book profit for three years and twenty-two per cent of total income for the life of the company, and it depends on the gap between book and taxable profit.
Can I switch out of the 22 per cent regime later?
No. Section 200(6) provides that once exercised, the option cannot be withdrawn for the same or any other tax year. A company that opts in while its Inter-Ministerial Board application is pending forfeits the deduction even for years after the certificate is granted.
Can an LLP claim the startup tax deduction?
Yes. An LLP can be an eligible startup and can claim under section 140. It is then within the alternate minimum tax provisions in section 206(2), at eighteen and a half per cent of adjusted total income rather than the fourteen per cent a company pays, because the deduction is added back in computing adjusted total income.
Does the twenty lakh AMT threshold protect an LLP?
No. Section 206(2)(d)(iii) confines that exemption to an individual, a Hindu undivided family, an association of persons, a body of individuals and an artificial juridical person. An LLP is taxed as a firm and is not in the list, so the alternate minimum tax provisions apply from the first rupee of adjusted total income.
Is AMT credit still available to an LLP?
Yes. The Finance Act, 2026 removed the minimum alternate tax credit for companies but left the alternate minimum tax credit in section 206(2)(e) to (g) intact. The excess of alternate minimum tax over regular income-tax is credited and carried forward, to be set off when regular tax exceeds the minimum, and not beyond the fifteenth tax year.
Which three years should a startup choose for the deduction?
The three must be consecutive, and the choice sits with the assessee under section 140(2), out of ten years from incorporation. Because the deduction only shelters profit, electing in the first year the company scrapes into profit spends a third of the entitlement on a small number. The counterweight is the ten-year outer limit, so waiting is only free while enough of the window remains for all three years.
Do I need an audit report to claim the deduction?
Yes, and it is a condition rather than a formality. Section 140(8) makes the deduction inadmissible unless the accounts of the eligible business have been audited by an accountant before the specified date referred to in section 63, and the report is furnished in the prescribed form by that date. A late report costs the deduction for that year.
When is the income tax return due for a startup company?
31 October of the financial year following the tax year, under the Table to section 263(1) of the Income-tax Act, 2025. The date moves to 30 November where a transfer pricing report under section 172 is required. An LLP files by 31 October where its accounts require audit and 31 July where they do not. Every company and every firm must file regardless of income.
Is angel tax still applicable to startups?
No. Section 56(2)(viib) of the Income-tax Act, 1961 stopped applying from assessment year 2025-26, and the Income-tax Act, 2025 contains no successor provision. The clause was switched off by an inserted proviso rather than deleted, so open assessments for earlier years continue under the old law. There is no reason to seek an angel tax exemption on a current round.
Do all recognised startups get the ESOP tax deferral?
No. Section 392(3) of the Income-tax Act, 2025 confines the deferral to an eligible startup referred to in section 140, which imports the Inter-Ministerial Board certificate. The timing is set by section 289(3): fourteen days after the earliest of sixty months from the end of the relevant tax year, the sale of the security, or the employee leaving. The window is sixty months, not forty-eight.
Will our accumulated losses survive a funding round?
On one of two tests. Section 119(3)(a) of the Income-tax Act, 2025 requires fifty-one per cent continuity of beneficial voting power. Section 119(3)(b) offers an alternative for an eligible startup referred to in section 140, where all shareholders who held voting shares on the last day of the loss year still hold them, for losses incurred within ten years of incorporation. The startup limb requires every one of them, so a single investor exiting fully breaks it, and the general limb then has to carry the loss.
References
Income-tax Act, 2025 (Act No. 30 of 2025), in force 1 April 2026, sections 17, 63, 102, 119, 140, 146, 148, 172, 195, 200, 206, 263, 289 and 392, as amended by the Finance Act, 2026 (Act No. 4 of 2026), incometaxindia.gov.in.
Section 140 of the Income-tax Act, 2025, as it stands for the year 2026, including the amendment footnote recording the substitution of "three" for "one" hundred crore rupees in sub-section (16)(b)(ii) by Act No. 4 of 2026 with effect from 1 April 2026.
Section 206 of the Income-tax Act, 2025, as it stands for the year 2026, including the amendment footnote recording the substitution of "14%" for "15%" in sub-section (1)(b)(ii), and the omission of clauses (m), (n), (o) and (p) of sub-section (1), both by Act No. 4 of 2026 with effect from 1 April 2026.
Income-tax Act, 1961, sections 56(2)(viib), 68, 79, 80-IAC, 80JJAA, 80M, 115BAA, 115JAA, 115JB, 115JC and 139, as they applied before 1 April 2026.
Finance (No. 2) Act, 2024, inserting the proviso disapplying section 56(2)(viib) of the Income-tax Act, 1961 on and after 1 April 2025.
Income-tax Rules, 2026, notified 20 March 2026, consolidating the prescribed forms with effect from 1 April 2026.
Startup India, for the recognition framework and the Inter-Ministerial Board application for the certificate of eligible business, startupindia.gov.in.
Disclaimer
This article is for educational and general business information purposes only and does not constitute professional legal, financial, or tax advice. Rates, thresholds, forms and due dates change by Finance Act, notification and circular, sometimes mid-year, and the correct position for any specific startup depends on its entity type, certification status, shareholding, accounting policies and the gap between its book and taxable profit. Two points in this article are expressly unsettled at the date of writing and are flagged as such in the text: the form and rule numbering for the audit report under section 140(8) under the Income-tax Rules, 2026, which could not be verified against the Board's published rules text; and the treatment of legacy minimum alternate tax credit held by a domestic company that has not exercised the option under section 200(5) or section 201(2), on which the enacted text of section 206(3) appears to make no provision. The choice between the section 140 deduction and the section 200 regime is irrevocable in one direction and should not be made from this article. Consult a qualified chartered accountant or tax advocate before acting on any rate,
Comments