Tax Deduction for Start-ups under Section 140 of the Income-tax Act, 2025

Start-ups

The Income-tax Act, 2025 introduces Section 140, a restructured and more comprehensive provision aimed at continuing tax incentives for eligible start-ups. This section is a refined version of the earlier Section 80-IAC, retaining its core objective—promoting innovation, scalability, and employment generation—while strengthening compliance and anti-abuse mechanisms.

1. Overview of Section 140

Section 140 provides a 100% deduction of profits and gains derived from an eligible business for any three consecutive years out of ten years from the year of incorporation.

This flexibility allows start-ups to strategically choose the most beneficial three-year window, typically when profitability stabilizes

2. Eligibility Criteria for Start-ups

To qualify for deduction under Section 140, the entity must satisfy the following conditions:

Entity Type

  • Must be a Company or Limited Liability Partnership (LLP)

Incorporation Period

  • Incorporated between 1 April 2016 and 31 March 2030

Turnover Threshold

  • Annual turnover should not exceed ₹100 crore in the relevant year

Certification Requirement

  • Must hold a valid certificate from the Inter-Ministerial Board (IMB)

Nature of Business

  • Engaged in:
    • Innovation or development of products/services
    • Improvement of existing processes
    • Scalable business models with high employment or wealth creation potential
Start-ups

3. Conditions Regarding Formation

The law ensures that only genuinely new businesses benefit:

  • Not formed by splitting or reconstruction of an existing business
  • No transfer of old machinery beyond 20% of total value

Permissible Exceptions

  • Imported second-hand machinery is allowed if:
    • It was never used in India
    • No prior depreciation was claimed in India
  • Use of old machinery up to 20% is permitted

4. Quantum and Period of Deduction

  • Deduction Amount: 100% of eligible profits
  • Duration: Any 3 consecutive years out of 10 years from incorporation

This provision enables tax planning by allowing start-ups to defer deduction claims until peak profitability years.

5. Computation of Profits

A key enhancement in Section 140 is the introduction of a “standalone computation principle”:

  • Profits of the eligible business are computed as if it is the only source of income

Inter-Business Transactions

Where transactions occur between:

  • Eligible and non-eligible businesses of the same assessee, or
  • Related parties

Then:

  • Profits must be adjusted to market value or arm’s length price (ALP)

6. Powers of the Assessing Officer (AO)

Section 140 grants wider authority to prevent misuse:

  • Recompute profits if standard computation presents difficulties
  • Adjust profits where transactions yield more than ordinary profits
  • Apply transfer pricing principles for specified domestic transactions

7. Mandatory Compliance Requirements

To claim deduction:

  • Accounts must be audited by a qualified accountant
  • Audit report must be filed before the due date
  • Proper documentation must substantiate eligibility and profit computation

8. Special Relief in Case of Business Disruption

Start-ups affected by unforeseen events are protected:

Eligible Events

  • Natural disasters (flood, earthquake, cyclone, etc.)
  • Fire or explosion
  • Riots or civil disturbances
  • War or enemy action

Relief Provision

If the business is revived within 3 years, it will still qualify, and the condition of “not formed by reconstruction” will not apply.

9. Key Restrictions

  • No double deduction: Same profits cannot be claimed under other provisions
  • Deduction is restricted to actual profits
  • Artificial inflation of profits is subject to AO adjustments

10. Government’s Power to Exclude

The Central Government retains authority to:

  • Notify specific industries or entities that will not be eligible for this deduction
  • Apply such exclusions prospectively

11. Section 80-IAC vs Section 140 – Key Improvements

AspectSection 80-IAC (Old Law)Section 140 (New Law)
StructureBasic provisionMore structured and detailed
Deduction100% profitsSame
Period3 out of 10 yearsSame
Incorporation windowUp to 2024 (extended)Extended till 2030
Profit computationGeneral rules“Only source” concept introduced
Inter-unit transactionsLimited guidanceMarket value / ALP mandated
Anti-abuse provisionsBasicStrong and explicit
Disruption reliefNot detailedSpecifically provided
Govt. exclusion powerNot explicitClearly defined

12. Practical Insight

From a strategic standpoint:

  • Start-ups should delay deduction claims until profitability peaks
  • Maintain robust documentation for IMB certification and audits
  • Carefully monitor related party and inter-unit transactions
  • Ensure compliance to avoid denial or recomputation of benefits

Read More: GST Return Filing and Compliance – A Simple, Practical Guide

Conclusion

Section 140 under the Income-tax Act, 2025 represents a refined, compliance-driven evolution of start-up tax incentives in India. While it continues to offer substantial tax relief, it simultaneously introduces greater scrutiny, structured computation, and anti-abuse safeguards.

For genuine start-ups focused on innovation and growth, this provision remains a powerful tax optimization tool, provided it is leveraged with proper planning and compliance discipline.

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