Eligibility, recognition, and the three-year exemption — read against the new direct tax law
The relief has changed address
For close to a decade, the startup tax holiday lived at Section 80-IAC of the old direct tax statute. That statute has been repealed. From 1 April 2026 the operative law is the Income-tax Act, 2025, and the tax holiday now sits at Section 140, inside Chapter VIII — the chapter dealing with deductions from total income.
The relief itself travelled across almost untouched. The conditions read the same, the three-year window is the same, and the ten-year outer limit is the same. What did not travel unchanged is everything around it: the minimum tax rules, the concessional corporate rate, and the recognition framework at the department that issues the certificates. A founder working from a 2023 guide will get the eligibility test broadly right and the value of the benefit badly wrong.
What the relief actually gives you
Section 140 allows a full deduction of the profits and gains of an eligible business for three consecutive tax years, chosen by the taxpayer out of the ten years beginning with the year of incorporation.
Two features are easy to miss. First, this is an exemption and not a deferral — profits sheltered in those three years are not taxed later. Second, it shelters only the profits of the eligible business. Interest on surplus funds, gains on sale of assets, and income from other business lines sit outside it.
The law also requires the profits of the eligible business to be worked out as if that business were the only source of income the taxpayer has, from the first year of the claim onward. Where a startup shares people, premises or cost pools with a sister entity, the standalone profit figure has to be defensible on its own terms.
Who qualifies
| Test | What the law requires | Where founders come unstuck |
| Entity form | A company or a limited liability partnership | Partnership firms, proprietorships and cooperative societies are outside the relief, even when they hold startup recognition |
| Date of incorporation | On or after 1 April 2016 and before 1 April 2030 | The date is fixed by incorporation, not by when the application is made. The window was pushed out by five years in 2025 |
| Turnover | Not more than one hundred crore in the tax year for which the deduction is claimed | This is the turnover of the whole business, not only the eligible business |
| Nature of business | Innovation, development or improvement of products, processes or services — or a scalable model with strong potential for employment generation or wealth creation | A trading, reselling or services-arbitrage model rarely clears this test, however well it is performing |
| Certificate | A certificate of eligible business from the Inter-Ministerial Board | Startup recognition on its own does not entitle anyone to the deduction |
| Not a reconstruction | The business must not be formed by splitting up or reconstructing a business already in existence | Converting a running family business into a company and presenting it as a new venture is the single most common disqualifier. A narrow exception exists where a business is revived after fire, flood, riot or similar damage |
| Plant and machinery | The business must not be built on plant or machinery previously used for any purpose | Up to twenty per cent of the total value is tolerated. Imported second-hand machinery never used locally, and never depreciated in anyone’s hands here, is not treated as used |
Recognition is not the same as exemption
This is where most claims are lost, and it is worth stating plainly. There are two gates, not one.
The first gate is startup recognition from the industry department. It is free, entirely online, and usually decided within days or a couple of weeks. It opens the door to fee rebates, self-certification and procurement access.
The second gate is the certificate of eligible business from the Inter-Ministerial Board. It is a separate application, judged on a much stricter reading of “innovation”, and it is the only document the tax law actually asks for. The scale of the gap between the two is striking: of roughly 1.97 lakh recognised startups as at April 2026, only around 3,700 hold the board’s certificate. The board is now required to decide within 120 days, but a weak application is simply refused rather than sent back for improvement.
The recognition framework was itself rewritten in February 2026. A formal deep tech category was created, the range of eligible entity forms was widened, and the turnover ceiling for recognition was raised. The tax ceiling was not. The result is a gap that will catch people out: a business can comfortably remain a recognised startup and still fail the turnover condition in Section 140 in the very year it wants to claim.
How to claim it
The mechanics are unforgiving, and three of them are hard stops.
File on time. The deduction is not available at all if the return is filed after the due date, or if the claim is not made in that return. There is no relief for a late filer, however strong the underlying case. This is the most avoidable way to lose a benefit worth several years of tax.
Get the audit report in. The accounts of the eligible business must be audited and the report furnished in the prescribed form by the specified date. The report is a condition of the deduction, not a formality attached to it.
Price internal transfers properly. Where goods or services move between the eligible business and any other business of the same taxpayer, the profits must be recomputed at market value if the recorded consideration does not reflect it. For specified domestic transactions, the arm’s length standard applies. Where the arrangement produces more than the ordinary profit the business could be expected to earn, the assessing officer can substitute a reasonable figure.
Finally, the deduction cannot exceed the profits of the eligible business, and profits allowed under Section 140 cannot be claimed again under any other provision.
The part that has genuinely changed: what the holiday is now worth
This is the analysis that most commentary skips, and it is the one that matters at board level.
A company on the concessional rate cannot claim it. The optional twenty-two per cent corporate rate requires the company to give up the incentive deductions in this chapter. So claiming the holiday means staying in the regular regime, on the headline rate, with surcharge and cess on top.
And the regular regime now carries a permanent minimum tax. A company in the regular regime pays minimum tax on its book profit where that exceeds tax on its computed income — which is exactly what happens during a tax holiday. The 2026 amendments cut that rate from fifteen to fourteen per cent, but made it a final tax: from tax year 2026-27, paying it no longer generates a credit that can be recovered in later years. What used to be a timing difference is now a real cost.
The practical consequence is that the holiday no longer takes a profitable company to nil. It takes it to roughly fourteen per cent of book profit, permanently, against roughly twenty-five per cent on computed income under the concessional route. The benefit is real, but it is a spread, not an exemption — and the size of that spread depends heavily on how far book profit sits from taxable profit. Heavy depreciation, large provisions, or share-based payment charges can close the gap considerably.
Limited liability partnerships face their own version. Claiming this deduction is itself the trigger that pulls an LLP into the alternate minimum tax at 18.5 per cent of adjusted total income. The deduction is added straight back for that calculation. Since the minimum-tax credit rules were reworked in 2026, the credit position needs to be checked rather than assumed.
None of this argues against claiming the holiday. It argues for modelling it before the entity structure and the regime election are locked in — because the regime election, once made, cannot be unwound.
Getting the timing right
The three years are chosen, not assigned, and the choice is worth real money.
Claiming in early loss-making years wastes the relief entirely — there are no profits to shelter, and the year is gone. The ten-year clock, meanwhile, runs from incorporation whether or not anything is claimed. The right approach is to project profitability across the ten-year window and place the three-year block over the highest sustained profits, while keeping an eye on the turnover ceiling, which tends to be breached in exactly the years the profits peak.
Because board approval takes months, the application should go in well before the first year the deduction is wanted, not during it. Founders who apply after becoming profitable frequently find that the year they wanted has already closed.
If you were already claiming under the old law
Startups mid-way through their three-year run do not start again. The years already claimed count, certificates already issued continue to hold good, and the claim simply continues under the new section. What does need attention is the paperwork: return schedules, audit reports, board notes and tax provisioning workings should all now cite Section 140 rather than the repealed provision, and any deferred tax modelling built on recoverable minimum tax credit needs revisiting.
Frequently asked questions
Is the tax holiday still available now that the old Act has been repealed? Yes. It continues at Section 140 of the Income-tax Act, 2025, in force from 1 April 2026, on substantially the same conditions.
Does startup recognition automatically give us the exemption? No. Recognition is a prerequisite. The deduction requires a separate certificate of eligible business from the Inter-Ministerial Board, and most recognised startups do not hold one.
We were incorporated in 2019 and have never claimed. Are we too late? Not necessarily. The ten-year window runs from the year of incorporation, so there is still room — but the certificate has to be in hand before the return for the first claim year is filed.
We expect losses in the first two profitable years of the window. Should we claim anyway? No. Claiming against losses uses up a year of the entitlement for nothing. Place the three-year block over years of sustained profit.
We are an LLP. Is the position different? The eligibility test is identical. The outcome differs: claiming the deduction pulls the LLP into the alternate minimum tax at 18.5 per cent of adjusted total income, because the deduction is added back for that computation.
Can a company on the twenty-two per cent concessional rate claim the holiday? No. That regime requires the company to forgo these deductions. The two are mutually exclusive, and the election is irreversible.
What happens if we file the return late? The deduction is lost for that year. Late filing is an absolute bar, not a procedural defect that can be cured.
We converted a long-running family business into a private company in 2021. Do we qualify? Very likely not. A business formed by splitting up or reconstructing an existing business is excluded, and this is one of the more closely examined conditions.
Our turnover will cross one hundred crore in year four of the window. What then? The turnover test applies year by year, in the year of claim. Crossing the threshold closes the door for that year — which is a strong argument for claiming earlier in the growth curve rather than later.
Are there other startup reliefs worth looking at alongside this one? Yes. The relaxed rule allowing recognised startups to carry forward losses despite a change in shareholding, provided the original shareholders continue, remains valuable and is often worth more than the holiday itself in a funded business.
How SRC can help
The tax holiday is not won at the filing stage. It is won eighteen months earlier, in how the entity is set up, how the innovation case is documented, and when the application goes in.
SRC Chartered Accountants works with founders across the full run of the relief:
- Eligibility review — an honest assessment of whether the business clears the reconstruction, machinery, entity and turnover tests before time and money go into an application
- Board application — drafting the innovation and scalability case, assembling financials and returns, and presenting the file in the form the board expects
- Window planning — modelling profits across the ten-year period to place the three-year block where it is worth most, and testing it against the turnover ceiling
- Regime modelling — comparing the holiday under the regular regime, including the permanent minimum tax cost, against the concessional corporate rate, before the election is made
- Claim and defence — standalone profit computations, the audit report, return schedules, and support if the claim is later examined
If you are approaching your first profitable year, or holding recognition without the certificate that actually unlocks the relief, it is worth a conversation now rather than at filing time.
Talk to SRC Chartered Accountants.
This article is general guidance current as at August 2026 and is not a substitute for advice on your specific facts.