Section 140 of Income Tax Act 2025: Startup 3-Year Tax Holiday Simplified

The Income Tax Act 2025, which received Presidential assent on March 29, 2025, introduces Section 140 as the new provision governing the 3-year tax holiday for eligible startups in India. This section replaces the well-known Section 80-IAC of the Income Tax Act, 1961, and carries forward the same core benefit: a 100% deduction on profits and gains for 3 consecutive assessment years out of a 10-year window from incorporation. For founders and CFOs planning their tax strategy under the new regime, understanding how Section 140 works, who qualifies, and how to claim it correctly is critical. This guide breaks down every element of the provision, from DPIIT recognition and IMB certification to the turnover cap, eligible business definition, and the transition from 80-IAC to Section 140.

What Is Section 140 of the Income Tax Act 2025?

Section 140 of the Income Tax Act 2025 falls under Chapter VIII (Deductions from Gross Total Income) and provides a tax holiday for eligible startups. The provision allows a 100% deduction of profits and gains derived from an eligible business for 3 consecutive tax years, chosen by the startup, within a block of 10 tax years beginning from the year of incorporation.

The rationale behind this provision is straightforward: startups typically operate at a loss during their early years, and by the time they become profitable, the tax burden can hamper reinvestment and growth. Section 140 lets the startup pick the 3 most profitable consecutive years within its first decade, claim full deduction on those profits, and pay zero income tax on business earnings during that period.

Statutory Placement in the New Act

The Income Tax Act 2025 reorganises the entire structure of income tax law in India. The old Act had 298 sections spread across 23 chapters. The new Act consolidates this into a cleaner framework. Section 140 sits alongside other deduction provisions in Chapter VIII, which covers deductions that reduce a taxpayer's gross total income to arrive at taxable income. Other notable deductions in this chapter include provisions for SEZ units, infrastructure development, and scientific research.

Old Section 80-IAC vs New Section 140: Complete Mapping

Section 80-IAC was introduced by the Finance Act, 2016, as part of the Startup India Action Plan announced by the Government of India. It provided the same 3-year tax holiday that Section 140 now continues. Understanding the mapping between the old and new provisions is essential for startups that were already claiming the deduction under the 1961 Act and will transition to the 2025 Act from AY 2026-27.

Eligibility Criteria Under Section 140: Who Qualifies?

Section 140 sets out five strict eligibility conditions that a startup must satisfy simultaneously. Missing even one disqualifies the entity from claiming the deduction. Each condition serves a specific anti-avoidance purpose, designed to ensure the benefit reaches genuinely innovative new ventures.

1. Entity Type: Company or LLP Only

The startup must be incorporated as a company under the Companies Act, 2013 (including private limited companies and OPCs) or as an LLP under the Limited Liability Partnership Act, 2008. Sole proprietorships, partnership firms, trusts, and Hindu Undivided Families (HUFs) do not qualify. This requirement ensures that the entity has a formal legal structure with registration, separate legal identity, and auditable financial statements.

2. Incorporation Date: April 1, 2016 to March 31, 2030

The date on the Certificate of Incorporation issued by the Registrar of Companies (ROC) or the Certificate of Incorporation issued by the LLP Registrar must fall on or after April 1, 2016 and before April 1, 2030. This 14-year window was originally set at April 1, 2016 to March 31, 2021, and has been extended multiple times through Finance Acts. The current deadline of March 31, 2030 was set by the Finance Act, 2024.

3. IMB Certification: Innovation-Driven Business

The startup must hold a certificate issued by the Inter-Ministerial Board of Certification as notified by the Central Government. This certificate confirms that the startup's business involves innovation, development, deployment, or commercialisation of new products, processes, or services driven by technology or intellectual property. Without the IMB certificate, the deduction cannot be claimed, regardless of DPIIT recognition status.

4. Anti-Splitting Rule: No Reconstruction or Split-Up

The startup must not be formed by splitting up or reconstruction of an existing business. This means a running business cannot restructure into a new entity simply to claim the 3-year tax holiday. The Income Tax Department scrutinises the formation of the entity, the nature of its business, and any connections to pre-existing operations during assessment proceedings.

5. Machinery Transfer Rule: 20% Cap on Used Assets

If the startup uses any plant or machinery that was previously used for any purpose, the value of such used assets must not exceed 20% of the total value of plant and machinery used in the business. This rule prevents startups from acquiring old assets from related entities and claiming them as a new business. The valuation is based on the written-down value of the assets at the time of transfer.

The 3-Year Tax Holiday: How the Deduction Mechanism Works

The mechanics of Section 140 are precise. Understanding exactly how the 3-consecutive-year window operates, what profits qualify, and how to compute the deduction is essential for accurate tax planning and ITR filing.

Choosing the 3-Year Window

The startup has a block of 10 consecutive tax years starting from the tax year of incorporation. Within this block, the startup selects a starting year, and the deduction applies for that year plus the next 2 years (3 consecutive years total). The selection is made at the option of the assessee when filing the income tax return for the first year of the chosen window. Once selected, the 3-year window cannot be changed.

Computing the Deductible Amount

The deduction equals 100% of profits and gains derived from the eligible business. This is computed from the profit and loss account of the startup, specifically isolating the income attributable to the eligible business. If the startup has multiple business activities, only the profits from the eligible (innovation-driven) business qualify. A qualified Chartered Accountant must audit and certify the computation. The deduction is applied against gross total income when computing taxable income.

Practical Example: Strategic Window Selection

Consider a startup incorporated in July 2023. Its 10-year window runs from AY 2024-25 to AY 2033-34. The startup operates at a loss in its first 3 years. By Year 4 (AY 2027-28), it turns profitable. It selects AY 2027-28 as the starting year for the 3-year deduction. The deduction then applies for AY 2027-28, AY 2028-29, and AY 2029-30, covering the years where the startup generates the highest profits. The tax saving in this scenario could run into crores of rupees depending on the profit level.

Step-by-Step Process to Claim Deduction Under Section 140

Claiming the Section 140 deduction involves a multi-step process that spans entity incorporation, government recognition, certification, and annual tax filing. Each step has specific prerequisites and timelines.

1. Incorporate as a Private Limited Company or LLP: Register your entity through the ROC. Ensure the incorporation date falls within the April 1, 2016 to March 31, 2030 window. Register your private limited company or register your LLP through IncorpX for compliant incorporation.
2. Register on the Startup India Portal: Visit the Startup India portal and create an account for your entity. Upload the Certificate of Incorporation, a brief description of your business, and details of your innovation or IP.
3. Obtain DPIIT Recognition: Apply for recognition from the Department for Promotion of Industry and Internal Trade. DPIIT evaluates whether the entity meets the definition of a startup (incorporated for less than 10 years, turnover below ₹100 crore, working towards innovation). Recognition is typically granted within 2-5 working days.
4. Apply for IMB Certification: After receiving DPIIT recognition, apply for the Inter-Ministerial Board certificate through the Startup India portal. The IMB evaluates the nature of the business, its innovation quotient, and whether it is driven by technology or IP. Processing time varies from 30 to 90 days.
5. Maintain Audited Financial Statements: Ensure your books of account are maintained and audited by a Chartered Accountant. The profit from the eligible business must be separately identifiable in the financial statements.
6. Select the 3-Year Deduction Window: Choose the starting year of your 3 consecutive years within the 10-year block. This selection is made at the time of filing the income tax return for the first year of the window.
7. File ITR with Section 140 Deduction: When filing your income tax return, claim the deduction under Section 140 (or Section 80-IAC for returns filed before AY 2026-27). Attach or keep ready the DPIIT recognition certificate, IMB certificate, and auditor's report on the eligible business profit.
8. Maintain Records for Assessment: Keep all certificates, audit reports, and computation workpapers for at least 8 years from the end of the relevant assessment year. The Income Tax Department may select the return for scrutiny assessment.

IMB Certificate: The Gateway to the Tax Holiday

The Inter-Ministerial Board (IMB) of Certification is the single most critical requirement for claiming Section 140 deduction. Without this certificate, no deduction is available, even if every other condition is met. The IMB is constituted by the Central Government and includes representatives from multiple ministries and departments.

What the IMB Evaluates

The Board assesses whether the startup's business genuinely involves innovation, development, deployment, or commercialisation of new products, processes, or services driven by technology or intellectual property. The evaluation criteria include:

• Novelty of the product, process, or service
• Technology or IP underpinning the business model
• Scalability and potential for employment generation
• Revenue model driven by the innovation rather than traditional trading or services
• Patents, trademarks, copyrights, or trade secrets held by the startup

Application Process for IMB Certification

The application is submitted through the Startup India portal after the entity has received DPIIT recognition. Required documents include: (1) a detailed description of the innovation or technology, (2) business plan or pitch deck, (3) details of any IP filings or grants, (4) audited financial statements, and (5) the DPIIT recognition certificate. The Board may request additional information or a presentation before making its decision.

DPIIT Startup Recognition: The First Step

Before applying for IMB certification, the entity must be recognised as a startup by the Department for Promotion of Industry and Internal Trade (DPIIT). This recognition is the foundational step that opens access to multiple Startup India benefits, including the tax holiday, angel tax exemption, fast-tracked patent applications, and government procurement preferences.

DPIIT Recognition Criteria

To receive DPIIT recognition, the entity must satisfy these conditions:

• Age: Not more than 10 years from the date of incorporation (for companies) or registration (for LLPs)
• Turnover: Annual turnover has not exceeded ₹100 crore in any financial year since incorporation
• Innovation: Working towards innovation, development, or improvement of products, processes, or services, OR has a scalable business model with high potential for employment generation or wealth creation
• Formation: Not formed by splitting up or reconstruction of an existing business

How to Apply for DPIIT Recognition

The application is submitted online through the Startup India portal. Required documents include the Certificate of Incorporation or Registration, a write-up describing the business and its innovative aspects, and details of any IP filings. The DPIIT typically processes applications within 2 to 5 working days. Upon approval, the startup receives a Recognition Certificate and a unique recognition number. This recognition is a prerequisite for both the IMB certification and the angel tax exemption.

Turnover Threshold: Understanding the ₹100 Crore Cap

The ₹100 crore turnover limit is one of the most misunderstood aspects of Section 140. The limit does not apply only to the 3 deduction years; it applies across the entire 10-year block from incorporation.

How the Turnover Cap Works

If the startup's total turnover exceeds ₹100 crore in any single financial year within the 10-year block from incorporation, the startup loses eligibility. This means even if you claimed the deduction in Years 4, 5, and 6, and your turnover crosses ₹100 crore in Year 8, the Department can reassess earlier deductions during scrutiny. Maintaining turnover records for the entire 10-year period is therefore non-negotiable.

What Constitutes Turnover?

Turnover for this purpose includes gross receipts from the business operations of the startup. It covers revenue from sale of products or services, export income, and other business receipts. Capital receipts, investment income, and extraordinary items are generally excluded. The exact definition follows the accounting standards applicable to the entity and any clarifications issued by the CBDT.

Entities That Cannot Claim Section 140 Deduction

Not every startup qualifies for the tax holiday. Section 140 contains explicit exclusions, and the Income Tax Department actively scrutinises claims to ensure compliance. The following entities and situations are disqualified:

Section 140 and Angel Tax: Separate but Connected

Startup founders often confuse the tax holiday under Section 140 with the angel tax exemption. These are two distinct tax provisions that address different aspects of startup taxation. Understanding the distinction is critical for comprehensive tax planning.

Angel Tax: Old Section 56(2)(viib) and Its Abolition

Angel tax was levied under Section 56(2)(viib) of the old Income Tax Act, 1961, when a startup issued shares at a premium exceeding the fair market value. The excess premium was taxed as income from other sources. This provision created significant friction for startup fundraising. The Finance Act, 2024 abolished angel tax for all investors effective from AY 2025-26 onwards. In the new Income Tax Act 2025, Section 98 governs share premium taxation, and the angel tax provision has been removed entirely.

How the Two Benefits Interacted

Under the old Act, DPIIT-recognised startups could claim both the angel tax exemption (on share premium) and the Section 80-IAC deduction (on profits). These were independent benefits. With angel tax now abolished for everyone, the primary tax benefit remaining exclusively for eligible startups is the 3-year profit deduction under Section 140. The DPIIT recognition now serves primarily as a prerequisite for the IMB certification needed for Section 140.

Common Mistakes When Claiming the Startup Tax Holiday

The Income Tax Department rejects or disallows Section 140 (and formerly 80-IAC) deductions more often than founders expect. Based on assessment orders and appellate decisions, these are the most frequent errors:

1. Claiming deduction without IMB certificate: DPIIT recognition alone is not sufficient. Many startups file returns claiming the deduction with only DPIIT recognition, without the separate IMB certificate. The deduction is disallowed during assessment.
2. Selecting non-consecutive years: The 3 years must be consecutive. Attempting to claim deduction in Years 3, 5, and 7 (skipping years) is invalid. The deduction must be for 3 years in a row.
3. Including non-business income: The deduction applies only to profits from the eligible business. Interest income, capital gains, or other income cannot be included in the deduction computation.
4. Failing to maintain separate accounts: If the startup has multiple business lines, only the eligible (innovation-driven) business qualifies. Without separate profit computation for the eligible business, the entire claim may be disallowed.
5. Ignoring the turnover cap after the deduction period: The ₹100 crore cap applies for the entire 10-year block, not just the 3 deduction years. A turnover breach in Year 9 can trigger reassessment of deductions claimed in Years 4, 5, and 6.
6. Not filing Form 10CCB or equivalent report: When prescribed, the startup must file an audit report certifying the deduction claim. Missing this report is a procedural defect that can lead to disallowance.

Compliance Requirements During the Deduction Period

Claiming Section 140 deduction is not a one-time event. Throughout the 3-year window (and the broader 10-year block), the startup must maintain ongoing compliance to protect its deduction from disallowance during assessment.

Annual Filing and Audit Obligations

The startup must file its income tax return on time for each year of the deduction window. Late filing can result in loss of the deduction under the provisions governing time-barred claims. The financial statements must be audited under Section 44AB (tax audit) if applicable, and the audit report must certify the profit from the eligible business.

ROC and DPIIT Compliance

Beyond income tax, the startup must maintain its corporate compliance with the Registrar of Companies. Failure to file annual returns (AOC-4, MGT-7) can lead to the company being marked as a defaulting company, which may trigger scrutiny of its tax claims. Additionally, the DPIIT recognition must remain valid; if the entity crosses the 10-year age limit or the ₹100 crore turnover threshold, the recognition may lapse, affecting the IMB certification validity.

Record Retention Period

All documents supporting the Section 140 deduction claim must be retained for a minimum of 8 years from the end of the relevant assessment year. For the 3-year deduction window, this means retaining records for 11 years from the first deduction year. Documents include the DPIIT recognition certificate, IMB certificate, audited financials, tax audit reports, Form 10CCB, and all correspondence with the Startup India portal.

Tax Planning Strategies for Maximum Section 140 Benefit

The flexibility in choosing the 3-year window creates a significant opportunity for tax planning. A well-timed selection can save the startup crores in tax outflow, while a poorly timed one can waste the benefit on low-profit years.

Strategy 1: Delay the Window to Peak-Profit Years

Most startups are unprofitable in their first 2-4 years. Starting the deduction window in Year 1 when the startup is still in a loss position yields zero tax saving. Instead, model your revenue and profit trajectory and start the window when you expect 3 consecutive years of high profitability. A Virtual CFO can build financial models to identify the optimal window.

Strategy 2: Align with Fundraising and Revenue Milestones

If the startup plans a major revenue scale-up after a funding round (Series A or Series B), timing the 3-year window to coincide with the post-funding growth phase maximises the deduction. The months immediately following a large funding round typically see increased revenue and profitability as the startup deploys the capital.

Strategy 3: Monitor the Turnover Cap Continuously

If the startup is approaching ₹100 crore in turnover, the window selection becomes urgent. Claim the deduction in the years before the turnover cap is breached. Once the cap is crossed, the deduction is lost for all remaining years. Revenue recognition timing, billing cycles, and contract structures can all affect when turnover is recognised, and proactive planning ensures the cap is not inadvertently breached before the deduction is fully utilised.

Section 140 for Different Entity Types

While Section 140 is limited to companies and LLPs, the practical implications differ based on the specific entity structure. Here is how the provision applies across the most common startup structures:

Other Startup-Relevant Sections in the New Act

Section 140 does not operate in isolation. The new Income Tax Act 2025 contains several other provisions relevant to startups. Understanding the broader framework helps founders plan their tax strategy holistically.

Section 98: Share Premium Taxation

Section 98 of the new Act governs the taxation of share premium received by a company. Under the old Act, this was the angel tax provision under Section 56(2)(viib). The Finance Act, 2024 abolished angel tax for all investors (including non-resident investors) effective from AY 2025-26 onwards. In the new Income Tax Act 2025, Section 98 no longer taxes share premium received from investors. This is a major relief for startups raising funding at high valuations.

Section 139: SEZ Deduction

Section 139 of the new Act replaces old Section 80-IAB and provides deductions for units operating in Special Economic Zones. Startups based in SEZs may be eligible for this deduction in addition to Section 140, depending on the specific conditions and whether any restriction on simultaneous claims applies.

Section 194: TDS Provisions

The new Act consolidates TDS provisions under updated section numbers. Startups must ensure compliance with TDS obligations on salary payments, contractor payments, rent, and professional fees. Non-compliance with TDS can result in disallowance of expenses, reducing the profits available for Section 140 deduction computation.

The Income Tax Act 2025 contains 536 sections across 23 chapters, replacing the 298 sections of the 1961 Act. Startup founders should work with a qualified tax professional or Virtual CFO to map all applicable provisions to their specific situation.

How IncorpX Helps You Claim Your Startup Tax Holiday

Navigating the Section 140 deduction requires coordination across entity formation, government recognition, certification, tax planning, and ongoing compliance. IncorpX provides end-to-end support through every stage of the process.

• Entity Formation: Private limited company registration or LLP registration with structures optimised for Section 140 eligibility from Day 1
• Startup India Registration: Complete DPIIT recognition application preparation, submission, and follow-up
• IMB Certification Support: Application preparation with detailed innovation documentation, business model analysis, and IP mapping to maximise approval probability
• Tax Filing: Income tax return filing with accurate Section 140 deduction computation, Form 10CCB filing, and documentation management
• Virtual CFO Advisory: Financial modelling for optimal 3-year window selection, turnover monitoring, and profit maximisation strategy
• Ongoing Compliance: Annual compliance management covering ROC filings, tax audits, and DPIIT compliance to protect your deduction from disallowance

Summary

Section 140 of the Income Tax Act 2025 carries forward the startup tax holiday previously available under Section 80-IAC of the 1961 Act. Eligible startups, meaning companies and LLPs incorporated between April 1, 2016 and March 31, 2030, with DPIIT recognition and IMB certification, can claim a 100% deduction on profits from their innovation-driven business for 3 consecutive assessment years within a 10-year block from incorporation. The turnover must not exceed ₹100 crore in any year of the 10-year window. The new Act takes effect from April 1, 2026 (AY 2026-27), and transitional provisions ensure startups already claiming the deduction under the old Act are not disrupted. Strategic selection of the 3-year window, proactive turnover monitoring, accurate profit computation, and meticulous documentation are the four pillars of a successful Section 140 claim. Act early, secure your DPIIT recognition and IMB certificate, and work with qualified professionals to time your deduction for maximum impact.