Tax Exemption For Startups In India – A 2025 Guide To Maximise Your Tax Benefits

In India’s fast-evolving startup landscape, tax exemptions are more than fiscal incentives, they are lifelines that help young ventures survive, grow, and thrive. For founders juggling product development, funding, and operations, every rupee saved on taxes is a rupee earned toward scaling. Recognising this, the Government of India has introduced powerful schemes like Section 80-IAC and angel tax relief to ease the financial burden on startups. But here’s the catch: these benefits don’t come automatically. DPIIT recognition is the critical gateway to accessing any startup tax exemptions. Without it, even the most innovative startup could miss out on game-changing relief. As of 2025, reforms like the removal of angel tax for DPIIT-recognised startups and streamlined application processes are making it easier than ever to claim what you're entitled to.

This Blog Covers:

• Importance of tax exemptions for startups
• DPIIT recognition and eligibility criteria
• Importance of Section 80-IAC
• Tax Exemptions Available for Startups
• Step-by-step application process

What Is DPIIT Recognition & Why It Matters For Tax Exemptions?

Startups seeking to leverage income tax exemptions and regulatory benefits under the Government of India’s Startup India initiative must first obtain formal recognition from the Department for Promotion of Industry and Internal Trade (DPIIT). This recognition is not optional; it is a statutory requirement for accessing key fiscal incentives, particularly those under Sections 80-IAC and 56(2)(viib) of the Income Tax Act, 1961.

What Is DPIIT?

The Department for Promotion of Industry and Internal Trade (DPIIT), functioning under the Ministry of Commerce and Industry, is the designated government authority that manages and implements policies for promoting industrial growth and entrepreneurship. As part of the Startup India Action Plan (2016), DPIIT is empowered to recognise startups that meet specific eligibility criteria related to innovation, scalability, and potential for employment generation.

Upon successful recognition, a startup is legally classified as a “DPIIT-recognised startup,” making it eligible to apply for tax exemptions and other government incentives.

Why DPIIT Recognition Is Mandatory for Tax Benefits?

Several flagship tax exemptions and policy incentives available to startups under Indian law cannot be availed without DPIIT recognition, including:

• Section 80-IAC: Provides a 100% tax exemption on profits for any three consecutive years within the first ten years of incorporation, subject to approval from the Inter-Ministerial Board (IMB). DPIIT recognition is a precondition for applying.

This information is based on the official Press Information Bureau (PIB) release dated 15 May 2025, which confirms that DPIIT approved 187 startups for tax exemption under the revised Section 80-IAC framework during its 79th and 80th Inter-Ministerial Board meetings. The eligibility window has also been extended to cover startups incorporated up to 1st April 2030.

• Section 56(2)(viib): Commonly known as “angel tax”, this section taxes investments above fair market value received from investors. DPIIT-recognised startups are eligible to claim full exemption from this provision.

Additionally, DPIIT-recognised startups benefit from:

• Access to government funding schemes like the Fund of Funds for Startups (FFS)
• Relaxations in public procurement norms
• Fast-track processing for intellectual property (IP) filings

Significance Of Section 80-IAC

Section 80-IAC plays a central role in India's startup tax framework. Introduced through the Finance Act, 2016, this provision offers a 100% income tax exemption on profits for eligible startups, making it one of the most powerful financial incentives available under the Startup India initiative. When applied strategically, it can significantly enhance a startup’s capacity to grow and reinvest during its formative years.

1. Complete Tax Holiday for Three Years
   Recognised startups can claim full exemption from income tax for any three consecutive years within their first ten years of incorporation, freeing up critical cash flow.
2. Backed by Legal Framework and IMB Scrutiny
   The benefit is not automatic; it requires DPIIT recognition followed by Inter-Ministerial Board (IMB) approval, ensuring only genuine, innovation-driven startups qualify.
3. Strengthened Through 2025 Policy Updates
   As per the Union Budget 2025–26, the eligibility window has been extended; startups incorporated up to April 1, 2030, can now apply. Additionally, the application process has been streamlined with a 120-day review timeline, improving transparency and efficiency.

This extension was officially announced in the Union Budget 2025–26 under the “Ease of Doing Business” measures, as documented in the Budget Highlights released by the Ministry of Finance.

4. Proven Track Record of Impact
   With over 3,700 startups already benefiting from this exemption since its inception, including 187 approvals in just two recent IMB meetings, Section 80-IAC has become a trusted route to financial viability.
5. Reinvestment and Credibility Advantages
   The exemption allows founders to redirect tax savings toward growth, R&D, and hiring, while also enhancing their startup’s credibility with investors, VCs, and accelerators.

This analysis is based on the latest PIB press release dated 15 May 2025, which outlines recent IMB approvals and key policy enhancements.

Legal Requirement For Availing Income Tax Exemption

Startups in India can claim tax exemptions under two important provisions of the Income Tax Act: Section 80-IAC (for income tax holiday on profits) and Section 56(2)(viib) (commonly known as Angel Tax exemption on share premium). To benefit under these provisions, startups must fulfil specific legal eligibility criteria and follow prescribed procedures.

Eligibility Criteria for Tax Exemption Under Section 80-IAC

This section offers a 100% deduction on profits for any three consecutive years within the first ten years of incorporation. Key eligibility requirements include:

• DPIIT Recognition: Mandatory for all startups seeking this exemption.
• Incorporation Period: The startup must be incorporated as a Private Limited Company or LLP on or after April 1, 2016, and before April 1, 2030 (extended as per the 2025 Union Budget).
• Turnover Limit: The startup’s turnover should not exceed ₹100 crore in any financial year since incorporation.
• Nature of Business: The startup must be engaged in innovation, development, deployment, or commercialisation of new products, services, or processes.
• Original Entity: It should not be formed by splitting or reconstructing an existing business.
• IMB Approval: The exemption is granted only after approval from the Inter-Ministerial Board (IMB), which evaluates the startup’s innovation potential and scalability.

To avail tax exemptions under Section 80-IAC, startups must strictly fulfill the DPIIT eligibility conditions. For detailed information, check out our complete guide on Startup India Registration Eligibility Criteria.

Note: Only after IMB certification can a startup claim the tax holiday in its Income Tax Return.

Eligibility Criteria for Angel Tax Exemption (Section 56(2)(viib))

Angel Tax applies to the excess consideration received on shares issued above fair market value, taxed as “income from other sources.” However, startups can claim exemption if they meet the following:

• DPIIT Recognition: Mandatory for all startups seeking this exemption.
• Paid-up Capital and Share Premium: Should not exceed ₹25 crore post-issue.
• Investor Restrictions: Investments must be from resident Indian investors or exempted categories. Investments from non-residents, venture capital funds, and certain listed companies are excluded.
• Use of Funds: The startup must not invest the raised funds in specified assets like shares, land, or jewelry for 7 years post-investment.
• Compliance: Investors and startups must provide PAN details and file the necessary declarations Form 2 under Rule 11UA via the Startup India portal.

Important Notes and Compliance Summary

• Both exemptions are distinct; a startup may qualify for one and not necessarily the other.
• DPIIT recognition is essential for both exemptions.
• Section 80-IAC requires additional IMB approval, while the Angel Tax exemption does not.
• Strict documentation, including DPIIT certificates, financial statements, and investor declarations, is mandatory to maintain compliance.
• Failure to meet any criteria may lead to denial of exemption and potential tax penalties.

Key Tax Exemptions Available For Startups In India

India offers several tax benefits to startups through various provisions in the Income Tax Act, GST laws, and related policies. These exemptions aim to boost cash flow, encourage innovation, and simplify compliance during the critical early years of a startup’s growth.

Below is a summarised table of the major tax exemptions available to DPIIT-recognised startups as of 2025:

Important Note

• Certain exemptions, such as Section 54GB, provide benefits primarily to investors, not directly to startups.
• Section 79 provisions protect startups’ tax benefits even when there is a change in shareholding, provided the original promoters maintain control.

How To Apply For Tax Exemption For Startups In India?

Startups recognised by DPIIT can apply for tax exemptions under Section 80-IAC (100% profit deduction) and Section 56(2)(viib) (Angel tax exemption) via the Startup India Portal. As of 2025, DPIIT has streamlined the process, with IMB reviews completed within 120 days.

Step-by-Step Process to Apply for Startup Tax Exemptions

To access tax benefits under Section 80-IAC and Section 56(2)(viib), startups must complete a structured process on the Startup India Portal. Here's a concise, connected guide to help you get it done.

Step 1: Obtain DPIIT Recognition

• Visit startupindia.gov.in and register/log in.
• Go to “Recognition” and fill in: Nature of business, incorporation details (CIN/LLPIN), innovation & scalability.
• Upload required documents: Certificate of Incorporation, PAN, etc.
• Submit and get DPIIT Certificate of Recognition.

Note: DPIIT Recognition form is mandatory for both the exemptions

Step 2: Apply for Section 80-IAC (100% Income Tax Exemption)

• Go to Dashboard → Tax Exemption → Section 80-IAC or Section 80-IAC application form

• Fill in: Financial year, profit/loss data, and innovation declaration.
• Upload: Certificate of Incorporation, MOA/AOA, board resolution, audited financials (if available).
• Submit for IMB review and approval.

Note: Only after IMB approval can you claim the Section 80-IAC tax benefit.

Step 3: Apply for Angel Tax Exemption – Section 56(2)(viib)

• Go to Dashboard → Tax Exemption → Section 56 (Form 2).
• Fill in: Investor PAN, name, and proposed share premium.
• Upload: Digitally signed Form-2 Declaration, financial projections (if applicable).
• Submit application.

Note: No IMB review required; approval is automatic if all conditions are met.

Processing Time Overview

If you're unsure what documents are required before applying, refer to our detailed list of documents required for Startup India registration.

Key Advantages Of Tax Exemption For Startups

Tax exemptions under the Startup India initiative offer more than just relief—they create room for innovation, growth, and investor trust. Here are the most significant advantages of availing tax benefits under Section 80-IAC, Section 56(2)(viib), Section 54GB, and other supporting provisions:

1. Boosts Cash Flow and Profitability: Startups can claim a 100% profit exemption for any 3 years under Section 80-IAC. This can save up to 30% in taxes, freeing capital for R&D, hiring, and expansion.

This helps improve margins and provides a longer financial runway in the early years.

2. Minimises Fundraising Risk (Angel Tax Exemption): Section 56(2)(viib) eliminates tax on share premiums received from genuine investors. Avoiding valuation disputes and scrutiny from the IT department. Enabling smoother equity fundraising without compliance anxieties.
3. Builds Investor Confidence: DPIIT-recognised startups with tax exemptions are seen as low-risk, credible ventures. Clarity around exemption status encourages VCs and angels to invest.

Note: Many investors now prefer startups with Form-2 (Section 56) approval.

4. Access to Additional Government Incentives: Tax exemption is a prerequisite for many central startup schemes, such as:

• Fund of Funds for Startups (FFS)
• Startup India Seed Fund Scheme (SISFS)
• Public procurement relaxations
• R&D incentives and IP support

5. Capital Gains Reinvestment Encouraged: Section 54GB exempts long-term capital gains if reinvested into startups. Making startup equity a preferred reinvestment avenue for residential property sellers. Redirecting private capital into early-stage innovation.
6. Retain Loss Carry Forward Despite Ownership Change: Under Section 79, DPIIT-recognised startups can carry forward business losses despite changes in shareholding (normally restricted). Crucial during restructuring, pivoting, or funding rounds.
7. Enables Innovation and Calculated Risk-Taking: With less tax pressure, startups can focus on building IP, hiring talent, and scaling without immediate profitability stress. Encouraging founders to experiment boldly without financial fear.

Also Read : Startup India benefits beyond Angel Tax relief

The Latest In 2025: What’s New And What’s Next

India’s startup tax policy saw pivotal changes in the Union Budget 2025–26 and recent DPIIT notifications. These updates signal a long-term commitment to reducing regulatory friction and supporting early-stage ventures.

Budget 2025 – Key Updates at a Glance

• Section 80-IAC eligibility extended: Startups incorporated up to April 1, 2030, are now eligible for the 100% income tax exemption.

Source: Union Budget 2025–26 Highlights, PIB.

• Angel Tax abolished: Section 56(2)(viib) has been removed for DPIIT-recognised startups, covering both domestic and foreign investors.

Sources: Finance Bill 2025, PIB Budget Summary

• 120-day cap on DPIIT review: The Inter-Ministerial Board (IMB) must now evaluate tax exemption applications within four months.

Source: Startup India Portal

• Accelerated approvals: 187 startups were granted exemptions in April 2025 alone, taking total approvals to over 3,700.

Source: PIB Startup Approval Data

• Upcoming reforms: The government plans integration with the Income Tax portal, sector-based automatic DPIIT recognition, and a possible five-year tax holiday.

Source: Startup India Portal, India Budget Vision Statement

What These Changes Mean for Founders and Investors?

For Founders

1. Extended Qualification Window: The eligibility extension to 2030 allows newer startups additional time to operationalise and still benefit from the three-year tax holiday under Section 80-IAC.
2. Simplified Fundraising: With the removal of Angel Tax, startups can raise capital without facing tax scrutiny on share premiums, especially useful for early-stage rounds.
3. Faster DPIIT Approvals: The 120-day review timeline enables better planning for tax strategy, restructuring, and investment rounds.
4. Higher Approval Rates: Recent DPIIT data indicates a favourable environment for exemption approvals, encouraging founders to file well-prepared applications.
5. Clearer Compliance Criteria: Standardised evaluation factors such as innovation and scalability provide more predictability in application outcomes.

For Investors

1. Lower Tax Risk: Investments in DPIIT-recognised startups are now free from Angel Tax exposure, making them more secure and attractive, particularly for foreign investors.
2. Streamlined Due Diligence: Improved DPIIT timelines and exemption clarity reduce delays in the investment evaluation process.
3. Increased Investment Opportunities: These reforms are expected to improve deal flow, particularly among early-stage and deep-tech startups.
4. Greater Policy Confidence: The six-year eligibility extension and structural reforms signal long-term policy stability, reassuring institutional and individual investors alike.

Expert Insights To Maximise Startup Tax Benefits

Maximising tax exemptions isn’t just about submitting forms, it requires strategic timing, documentation, and legal awareness to help you leverage the full potential of benefits under Section 80-IAC, Section 56(2)(viib), and related provisions.

1. Apply for DPIIT Recognition Early
2. • Why it matters: DPIIT recognition is mandatory to avail any startup-related tax benefits. Many founders delay this step, risking future eligibility.
   • Expert Tip: Apply within the first 12–24 months of incorporation, even if you're pre-revenue. Recognition is required before you apply for Section 80-IAC or angel tax exemptions.
2. Strategically Time the 3-Year Tax Holiday (Section 80-IAC)
3. • Why it matters: The 100% income tax deduction is available for any 3 consecutive years within the 10-year incorporation window.
   • Expert Tip: Don’t trigger the exemption too early. Fill Form-1 in the first profitable year to maximise tax savings during your growth phase.
3. Build a Compelling 80-IAC Application
4. • What IMB looks for:
   • • Innovation in product/service
     • Scalable business model
     • Job creation and economic contribution
   • Expert Tip: Support your application with a professional pitch deck, traction data, and real customer proof. Treat it like a VC pitch.
4. Use Angel Tax Exemption as an Investment Lever
5. • Why it matters: Angel tax exemption under Section 56(2)(viib) allows startups to raise funds without tax scrutiny over share premiums.
   • Expert Tip: Once DPIIT-recognised, file Form-2 at the time of or soon after your funding round. Share this exemption status proactively with investors.
5. Maintain Audit-Ready Financial and Legal Records
6. • Why it matters: Clean books and timely filings are essential for both exemption approvals and future tax assessments.
   • Expert Tip: Work with a CA to review financials quarterly. Ensure regular compliance with ITRs, GST, and MCA filings.
6. Consult Experts Before Exercising Exemptions
7. • Why it matters: Misfiling or mistiming Form-1 or Form-2 can permanently disqualify your startup from tax benefits.
   • Expert Tip: Always consult a startup-specialised tax advisor before:
   • • Filing for 80-IAC or angel tax exemptions
     • Restructuring equity or bringing in new investors
7. Monitor DPIIT/IMB Communications Regularly
8. • Why it matters: Delayed or missed responses to DPIIT queries can stall or reject your application.
   • Expert Tip: Assign a compliance lead to track your Startup India dashboard weekly. Respond promptly to clarification requests.

Conclusion

India’s evolving tax exemption regime, anchored in DPIIT recognition, Section 80-IAC, and angel tax reforms, is more than a policy framework; it’s a powerful enabler for startup growth. The 2025 reforms, including the extended eligibility to 2030, abolition of angel tax, and faster DPIIT approvals, reflect the government's deepening support for innovation and entrepreneurship.

For founders, these benefits offer more than tax relief, they provide a critical edge in cash flow management, investor confidence, and long-term sustainability. But unlocking them requires foresight: early DPIIT registration, careful timing of exemptions, rigorous compliance, and expert guidance.

Startups are built on bold ideas, but scaling them requires strategic execution. By actively leveraging these tax incentives, founders don’t just save money, they gain the momentum to build resilient, investor-ready ventures. In today’s dynamic market, understanding and utilising these provisions could be the difference between staying afloat and building something extraordinary.

Frequently Asked Questions

If you're exploring tax benefits for your startup, these quick FAQs will help clarify key provisions and processes that matter most to founders.

Q1. What is Section 80-IAC, and how does it benefit startups?

Section 80-IAC allows eligible startups to claim a 100% tax deduction on profits for any three consecutive years within the first ten years from incorporation. This tax holiday supports startups in reinvesting profits and scaling up without immediate tax burdens.

Q2. Who is eligible for the Section 80-IAC tax exemption in 2025?

Startups must be incorporated as a Private Limited Company, LLP, or Registered Partnership between April 1, 2016, and April 1, 2030. They must have DPIIT recognition, a turnover below ₹100 crore in any financial year for which the deduction is claimed, and not be formed by splitting up or reconstructing an existing business.

Q3. What is DPIIT recognition, and why is it necessary for tax benefits?

DPIIT (Department for Promotion of Industry and Internal Trade) recognition certifies a business as a startup under the government’s Startup India initiative. It is mandatory to apply for both the Section 80-IAC tax holiday and the angel tax exemption.

Q4. Is IMB approval required for claiming the Section 80-IAC exemption?

Yes, after obtaining DPIIT recognition, startups must apply to the Inter-Ministerial Board (IMB) for approval to claim the Section 80-IAC exemption. Approval is based on innovation, scalability, and potential for job creation or wealth generation.

Q5. What is the process to apply for DPIIT recognition and tax exemptions?

Startups must register on the Startup India portal or National Single Window System, submit required documents for DPIIT recognition, and then separately apply for Section 80-IAC and/or angel tax exemption after recognition.

Q6. How long does it take to get DPIIT recognition and Section 80-IAC approval?

DPIIT recognition typically takes 1–2 weeks. The revised 2025 framework ensures Section 80-IAC applications are reviewed within 120 days after submission of a complete application.

Q7. Has the eligibility window for Section 80-IAC been extended in 2025?

Yes, as per the Union Budget 2025–26, startups incorporated up to April 1, 2030, are now eligible to apply for Section 80-IAC benefits, extending the previous cutoff from March 31, 2025.

Q8. What happens if a startup does not get IMB approval for Section 80-IAC?

If a startup’s application is not approved, it cannot claim the Section 80-IAC tax holiday. However, it may refine its application and reapply, focusing on demonstrating innovation, scalability, and economic impact as advised by DPIIT.