80-IAC and the start-up tax holiday: what it is worth after MAT and 115BAA
The holiday is not a zero-tax outcome
Every founder who hears "one hundred per cent tax holiday" assumes the company pays nothing for three years. It rarely works out that way. Section 80-IAC removes profits from the normal computation without removing them from book profit — and book profit is what Minimum Alternate Tax is charged on.
What section 80-IAC actually gives
- A deduction of one hundred per cent of the profits and gains of an eligible business
- For three consecutive assessment years, chosen by the company
- Out of the first ten years from the date of incorporation
- Available only to a DPIIT-recognised start-up, incorporated inside the notified window, whose turnover stays within the prescribed limit in the year of the claim
The incorporation cut-off has been extended more than once. Confirm the window applicable to your own date of incorporation before planning around it.
Where MAT bites
Section 115JB charges tax at fifteen per cent of book profit wherever that exceeds the tax payable on normal income. An 80-IAC claim reduces normal income, frequently to nil. It leaves book profit exactly where it was. MAT therefore becomes the operative liability, and the holiday turns out to be a reduction rather than an exemption.
Three routes, one set of numbers
Take a DPIIT-recognised private limited company, turnover comfortably inside the threshold for the lower domestic rate, with profit before tax and book profit both ₹2,00,00,000.
Route A — claim 80-IAC and stay in the normal regime
| Step | Amount |
|---|---|
| Business profit | ₹2,00,00,000 |
| Less: deduction under section 80-IAC | (₹2,00,00,000) |
| Total income | Nil |
| Tax on total income | Nil |
| Book profit under section 115JB | ₹2,00,00,000 |
| MAT at 15% | ₹30,00,000 |
| Surcharge at 7% | ₹2,10,000 |
| Cess at 4% | ₹1,28,400 |
| Tax payable | ₹33,38,400 |
That is an effective 16.69% of book profit. The entire ₹33,38,400 also becomes MAT credit under section 115JAA, available for set-off over the following fifteen assessment years.
Route B — opt into section 115BAA
Section 115BAA offers twenty-two per cent, but it is conditional on giving up most Chapter VI-A deductions. Section 80-IAC is one of them.
| Step | Amount |
|---|---|
| Total income, no 80-IAC claim | ₹2,00,00,000 |
| Tax at 22% | ₹44,00,000 |
| Surcharge at 10% | ₹4,40,000 |
| Cess at 4% | ₹1,93,600 |
| Tax payable | ₹50,33,600 |
An effective 25.17%. MAT does not apply at all under this section, so no credit arises.
Route C — normal regime, holiday not claimed
| Step | Amount |
|---|---|
| Total income | ₹2,00,00,000 |
| Tax at 25% | ₹50,00,000 |
| Surcharge at 7% | ₹3,50,000 |
| Cess at 4% | ₹2,14,000 |
| Tax payable | ₹55,64,000 |
The comparison
| Route | Tax payable | Effective rate | MAT credit created |
|---|---|---|---|
| A — 80-IAC, MAT applies | ₹33,38,400 | 16.69% | ₹33,38,400 |
| B — section 115BAA at 22% | ₹50,33,600 | 25.17% | None |
| C — normal rate, no claim | ₹55,64,000 | 27.82% | None |
During the holiday years the answer is not close. Route A costs roughly ₹17 lakh less than the 115BAA route on these numbers, and it banks a credit worth as much again.
The trap is in the sequence
The twenty-two per cent rate looks attractive once the three holiday years are used up. But opting into 115BAA is not a neutral switch:
- Chapter VI-A deductions cease, section 80-IAC among them
- MAT under 115JB stops applying
- and accumulated MAT credit ceases to be available
A company that banks ₹33 lakh of credit during its holiday and then moves to 115BAA writes that credit off. The credit only has value if the company stays in the normal regime long enough to absorb it against future normal tax.
The order in which a start-up uses the holiday, the credit and the 115BAA option is usually worth more than any one of them taken alone.
A workable sequence
- Claim 80-IAC in the three years of highest expected profit within the first ten
- Pay MAT and bank the credit
- Remain in the normal regime for as long as normal tax exceeds MAT, absorbing the credit year by year
- Model the switch to 115BAA only once the credit is exhausted, or clearly cannot be used
A new manufacturing company should also test section 115BAB at fifteen per cent before assuming 115BAA is the right comparison.
Rates used in this note
The arithmetic above applies MAT at fifteen per cent, the domestic company rate at twenty-five per cent where turnover is within the threshold, section 115BAA at twenty-two per cent, surcharge at seven per cent for total income between ₹1 crore and ₹10 crore and at a flat ten per cent under 115BAA, and cess at four per cent throughout.
Rates, thresholds and the 80-IAC incorporation window change with almost every Finance Act. Confirm the position for the assessment year you are planning before relying on any of these figures, or ask us to run the computation on your own numbers.