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Sharanya Radhakrishnan Nair

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A Helping Hand for Startups: Understanding the Benefits of Section 80IAC

In the initial stages of their business, many promising startups face significant financial constraints that restrict their expansion and growth. These restrictions often limit their ability to produce or sell enough products or services to generate considerable profits. Even when startups do manage to earn some revenue, a large portion of it goes to pay off taxes, leaving them with limited resources for reinvestment. This lack of investment capital further restricts their ability to scale operations, expand their market reach, and achieve justifiable growth.

Startups play a crucial role in the dynamism of the Indian economy, driving innovation, fostering entrepreneurship, and propelling economic growth. Recognizing the importance of startups, the Indian government has implemented various initiatives to support and nurture their development. One such initiative is Section 80IAC of the Income Tax Act, which provides much-needed tax relief to eligible startups.

What is the exemption under the section 80 IAC?

For startups, Section 80IAC serves as a shining light offering a substantial 100% tax deduction on profits and gains from their business operations. This deduction extends throughout three out of ten assessment years, providing startups with critical financial growth during their constructive years. This incentive is available to startups incorporated between April 1, 2016, and March 31, 2021, provided they had not engaged in any commercial production before their incorporation.

Eligibility Criteria for Claiming 80 IAC :

To be eligible for Section 80 IAC, a startup must meet the following criteria:

 

  • It must be a company or a limited liability partnership (LLP)
  • It must be incorporated in India
  • It must be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT) as a startup
  • It must be engaged in the innovation, development, or commercialization of new products, processes, or services
  • It must not have been formed by splitting up or restructuring an existing business

Benefits of Section 80 IAC :

To eligible startups, Section 80IAC provides numerous important benefits, including:

 

1. Tax Savings: 

The 100% tax deduction on profits and gains allows startups to retain more of their earnings, which can be reinvested in the business for growth and expansion.

2. Financial Flexibility: 

The tax relief provides startups with enhanced financial flexibility to pursue their business objectives without the immediate weight of tax liabilities.

3. Attracting Investors: 

The tax incentive makes startups more attractive to investors, as it lowers the risk and enhances the potential for returns.

4. Promoting Innovation: 

By encouraging investment in innovative startups, Section 80IAC fosters a culture of innovation and entrepreneurship.

5. Economic Growth: 

By supporting startups, Section 80IAC contributes to job creation, economic growth, and overall national development.

Compliance Requirements for Claiming Section 80IAC Benefits :

To benefit from Section 80IAC, startups must meet the following compliance requirements:

 

1. Obtaining DPIIT Recognition:

The startup must obtain DPIIT recognition as a startup.

2. Maintaining Startup Status:

Throughout the deduction period, the startup must continue to meet the eligibility criteria.

3. Tax Return Filing:

In order to claim the deduction, the startup must file its income tax returns on time.

4. Thorough Documentation: 

The startup must keep detailed records of its business activities and financial transactions.

List of Documents Required :

1. CIN / LLPIN

2. MOA / Partnership Deed LLP agreement 

3. Business PAN

4. DPIIT Recognition Certificate

5. CA Certified Balance Sheet for the last 3 FY

6. ITR of last 3 FY. before 01/04/2018

7. Section 56 Exemption Certificate

8. Board Resolution (for a company only)

9. Pitch deck

Conclusion :

Section 80IAC plays a pivotal role in supporting the growth and development of startups in India. By providing tax benefits, the government encourages entrepreneurship, innovation, and economic progress. Startups can leverage this tax incentive to strengthen their financial position, attract investors, and contribute to the nation’s economic growth. As India’s startup ecosystem continues to flourish, Section 80IAC will undoubtedly remain a cornerstone of support, paving the way for a brighter future.

FAQs on 80IAC :

The certificate of eligible business is valid for three consecutive assessment years out of ten years, beginning from the year in which the certificate is granted.

No, an eligible startup can only avail itself of the tax benefit under Section 80IAC for three consecutive assessment years out of ten years.

  • The documents required to apply for a certificate of eligible business include:
  1. DPIIT recognition certificate.
  2. Business Profile.
  3. Financial statements.
  4. Details of innovation or development activities.
  5. Employment generation potential.

Yes, a startup that has already received its certificate of eligible business can apply for a refund of taxes paid in previous years for which the startup was eligible for deduction under Section 80IAC.

If a startup loses its certificate of eligible business, it will no longer be entitled to the tax benefits under Section 80IAC. The startup will be required to pay the taxes that it would have otherwise been entitled to deduct.

You can check the status of your tax exemption application by going to the Startup India Portal. Simply log in to your account and select ‘Dashboard’.

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