Startup Taxation

DPIIT recognition does not by itself exempt a startup from income tax. The main income tax benefit, Section 80-IAC [ITA 2025: s. 140], permits an eligible startup to deduct 100% of eligible-business profits for three consecutive years chosen within its first ten years, subject to a separate certificate of eligible business from the Inter-Ministerial Board of Certification and the other statutory conditions. In every other year, and on income outside the eligible business, the startup is subject to the regular tax computation and any applicable MAT or AMT. A startup also remains subject to applicable tax-deduction and return-filing obligations from the start. We map which years and which income are actually covered.

The Income Tax Act 2025 took effect on 1 April 2026, subject to repeal and savings, and renumbered the provisions startups rely on. The Section 80-IAC [ITA 2025: s. 140] profit holiday, the salary withholding rules under Section 192 [ITA 2025: s. 392], and salary perquisites under Section 17 [ITA 2025: s. 17] apply according to the relevant period. The Act also adopts the Tax Year in place of the previous year and assessment year. Former Section 56(2)(viib) ceased to apply to share issues on or after 1 April 2025. We apply the current references when preparing claims and returns.

For tax year 2026-27, a domestic company pays the ordinary 25% rate only where its turnover or gross receipts in tax year 2024-25 did not exceed Rs 400 crore; otherwise the ordinary rate is 30%. It may opt for Section 115BAA [ITA 2025: s. 200] at 22% if all conditions are met, while Section 115BAB [ITA 2025: s. 201] is a separate regime for qualifying new manufacturing domestic companies. A firm, including an LLP, pays 30%. The Finance Act 2026 adds the applicable surcharge and a 4% Health and Education Cess. We compare the options against the startup's profit profile before an irreversible option is exercised.

No, and this is a common and costly oversight. The 22% concessional regime under Section 115BAA [ITA 2025: s. 200] requires the company to give up specified profit-linked deductions, which include the Section 80-IAC [ITA 2025: s. 140] startup holiday. A company that opts into the 22% rate cannot also claim the three-year holiday on those profits. The right choice depends on the size and timing of expected profits. We model both paths before the option is exercised, because once chosen the concessional regime cannot be reversed.

There are two separate approvals. After DPIIT recognition, the startup files an application in Form 1 to the Inter-Ministerial Board of Certification, which issues the certificate of eligible business. Only then is the deduction claimed under Section 80-IAC [ITA 2025: s. 140] in the income tax return, for the three consecutive years selected, by a private limited company or limited liability partnership. The claim must be supported under Rule 18BBB [ITR 2026: r. 66] by the audit report in Form 10CCB [ITR 2026: Form 32], and the eligible-business profit must be computed separately from other income. The return must be filed by the applicable due date because Section 80AC [ITA 2025: s. 122] conditions the deduction on timely filing; a belated return forfeits the deduction. We prepare the Form 1 application, the certification record, the year selection, the audit report and the return.

ESOPs are taxed at two separate points. First, when the employee exercises the option and receives shares, the difference between the fair market value and the exercise price is a perquisite taxed as salary under Section 17 [ITA 2025: s. 17], with the employer withholding tax. Second, when the employee later sells the shares, any gain over that fair market value is taxed as a capital gain. The two events tax two different gains, which is why people describe ESOPs as taxed twice. We help design the plan and the valuations behind both points.

An eligible startup can let employees defer the tax on the exercise perquisite, which eases the cash strain of paying tax on shares that cannot yet be sold. For an eligible startup under Section 80-IAC [ITA 2025: s. 140], the deferral under Section 192(1C) [ITA 2025: ss. 289(3), 392(3)] runs until the earliest of 48 months from the end of the relevant assessment year under the 1961 Act, or 60 months from the end of the relevant tax year under the 2025 Act, the date the employee sells the shares, or the date the employee leaves. Only startups meeting the eligible-business definition qualify. We confirm eligibility and set up the deferral and the payroll tracking.

A convertible note can be issued only by a DPIIT-recognised startup company, for a minimum of Rs 25 lakh in a single tranche, and it converts to equity or is repaid within ten years. Receipt of a genuine convertible-note principal is ordinarily a capital receipt, subject to the source and genuineness requirements of Section 68 [ITA 2025: s. 102], and conversion into shares is not itself a taxable event where the instrument and conversion fall within Section 47(x) [ITA 2025: s. 70(1)(z)]. Since former Section 56(2)(viib) does not apply on or after 1 April 2025, raising funds above fair value no longer triggers that former charge, though pricing rules still apply to investment from outside India. Compulsorily convertible preference shares and similar instruments each carry their own treatment, which we map before the round.

A straight share sale produces capital gains for the founder. For buybacks completed from 1 October 2024 to 31 March 2026, the legacy deemed-dividend treatment may apply. For buybacks from 1 April 2026, Section 46A [ITA 2025: s. 69] applies capital-gains treatment and the new additional income-tax mechanism for a promoter shareholder; the applicable promoter-category rates include 2% or 10% for short-term gains and 9.5% or 17.5% for long-term gains, depending on the statutory category. We identify the shareholder category and completion date before modelling an exit.

Yes. Once a startup pays salaries, contractor or professional fees, rent, or similar amounts above the prescribed thresholds, it must obtain a Tax Deduction Account Number, an obligation now under Income-tax Act 2025 Section 397, and deduct tax at source before paying. Salary deduction falls under Section 192 [ITA 2025: s. 392] and every other payment under Income-tax Act 2025 Section 393, which from 1 April 2026 consolidates the earlier scattered TDS sections. The startup then deposits the tax by the due date and files quarterly returns, with salary reported in Income-tax Rules 2026 Form 138 and other payments in Income-tax Rules 2026 Form 140. We set up the deduction calendar so a young team does not accumulate interest and penalties.

Yes, and filing on time matters even in loss years. A startup must furnish its loss return within the statutory time under Section 139(3) [ITA 2025: s. 263], because Section 80 [ITA 2025: s. 121] makes timely filing a condition for carrying forward eligible business losses and setting them against future profits. Section 79 [ITA 2025: s. 119] gives qualifying eligible startups a specific relaxation that protects carried-forward losses through funding rounds despite changes in shareholding, provided the conditions are met. Disciplined filing therefore preserves real future value. We maintain the filing calendar and the loss schedule so nothing is lost to a missed date.

Claimed benefits carry continuing conditions. The Section 80-IAC [ITA 2025: s. 140] holiday depends on the applicable turnover ceiling—₹100 crore for a claim governed by the 1961 Act and ₹300 crore for a claim governed by the 2025 Act—and on the eligible-business and claim-year conditions. The ESOP deferral has its own eligible-startup and payment-trigger conditions, and DPIIT recognition itself runs only to ten years from incorporation, or twenty years for a qualifying deep-tech startup, with a recognition turnover ceiling of ₹200 crore, increased to ₹300 crore for a qualifying deep-tech startup. Shareholding changes, turnover growth, and applicable filings all need monitoring, since a breach may affect a benefit already claimed. We track these conditions through each year and each funding round.