Section 140 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Section 140 lets an eligible start-up deduct hundred per cent of the profits from its eligible business for three consecutive tax years, which the start-up chooses from the first ten years after its incorporation. The section sets out who is an eligible start-up, the conditions for the business, an audit requirement, rules on transfers of goods and services, and a power for the Central Government to switch the benefit off for a class. This article reads section 140 as per the Income-tax Act, 2025 as amended by the Finance Act, 2026; later amendments, rules and notifications should be checked. For help claiming the deduction, see our tax planning advisory.
An eligible start-up (a company or limited liability partnership engaged in eligible business, incorporated on or after 1 April 2016 but before 1 April 2030, with total turnover not exceeding three hundred crore rupees, holding a certificate of eligible business from the Inter-Ministerial Board of Certification) can claim a deduction of hundred per cent of the profits from that business for three consecutive tax years, chosen out of the ten years beginning from the year of incorporation. The accounts must be audited before the specified date in section 63. The word "three" in the turnover limit was substituted by the Finance Act, 2026, with effect from 1 April 2026.
A note on the heading
The marginal heading printed in the Act for section 140 is "Special provision in respect of specified business"; the content of the section is the deduction for an eligible start-up. This article follows the content.
Section 140(1) and (2): the deduction and the window
- Sub-section (1). Where the gross total income of an assessee, being an eligible start-up, includes profits and gains derived from eligible business, then as per and subject to the section, a deduction of an amount equal to hundred per cent of the profits and gains derived from that business is allowed for three consecutive tax years.
- Sub-section (2). The deduction may, at the option of the assessee, be claimed for any three consecutive tax years out of ten years beginning from the year in which the eligible start-up is incorporated.
Example (invented). Nimbus Labs LLP was incorporated in a tax year and carries on eligible business. It earns small profits in its first three years and larger profits from year 4. Under sub-section (2) it may choose years 4, 5 and 6 as the three consecutive years, because they fall inside the ten years beginning with the year of incorporation. If profits of the eligible business in year 4 are Rs. 25,00,000, the deduction is hundred per cent of Rs. 25,00,000, that is Rs. 25,00,000 (the figure is assumed for illustration).
Section 140(3) to (6): conditions on the start-up
Sub-section (3)
The section applies to a start-up that fulfils both conditions:
- (a) it is not formed by splitting up, or the reconstruction, of a business already in existence; and
- (b) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Sub-section (4): re-establishment after damage
If the business of an undertaking carried on in India is discontinued in a tax year by reason of extensive damage to, or destruction of, a building, machinery, plant or furniture owned by the assessee and used for the business, as a direct result of (a) flood, typhoon, hurricane, cyclone, earthquake or other convulsion of nature; (b) riot or civil disturbance; (c) accidental fire or explosion; or (d) action by an enemy or action taken in combating an enemy (whether with or without a declaration of war), and the business is re-established, reconstructed or revived before the expiry of three years from the end of that tax year, the condition in sub-section (3)(a) does not apply to that undertaking.
Sub-section (5): imported machinery
For sub-section (3)(b), machinery or plant that was used outside India by a person other than the assessee is not regarded as previously used if: (a) it was not, before installation by the assessee, used in India; (b) it is imported into India; and (c) no depreciation on it has been allowed or is allowable under the Act in computing any person's total income for any period before installation by the assessee.
Sub-section (6): the 20% allowance
Where in the case of a start-up any machinery or plant (or part) previously used for any purpose is transferred to a new business and its total value does not exceed 20% of the total value of the machinery or plant used in the business, the condition in sub-section (3)(b) is deemed to have been complied with.
Example (invented). A start-up's machinery and plant used in the business has a total value of Rs. 50,00,000, of which Rs. 8,00,000 was previously used elsewhere and transferred in. Rs. 8,00,000 is 16% of Rs. 50,00,000, which does not exceed 20%, so the condition in sub-section (3)(b) is deemed complied with. Had the transferred plant been Rs. 12,00,000 (24%), the deeming would not apply.
Section 140(7) to (14): how the profits are worked out
| Sub-section | Rule |
|---|---|
| (7) | Irrespective of anything else, the profits of the eligible business, for working out the deduction for the tax year after the initial tax year or any later year, are computed as if the eligible business were the only source of income of the assessee during the initial tax year and every subsequent tax year up to and including the year for which the deduction is determined |
| (8) | The deduction is not admissible unless the accounts of the eligible business for the tax year are audited by an accountant before the specified date in section 63 and the assessee furnishes the audit report in the prescribed form, signed and verified by the accountant, by that date |
| (9) | Where goods or services held for the eligible business are transferred to another business of the assessee (or the reverse) and the recorded consideration does not correspond to market value on the date of transfer, the profits of the eligible business are computed as if the transfer had been at market value |
| (10) | If the Assessing Officer finds that computing in that manner presents exceptional difficulties, he may compute the profits on such reasonable basis as he deems fit |
| (11) | "Market value" means (i) the price the goods or services would ordinarily fetch in the open market, or (ii) the arm's length price as defined in section 173(a), where the transfer is a specified domestic transaction referred to in section 164 |
| (12) | A claim allowed under the section bars further deduction, to the extent of those profits, under any other provision of Part C of the Chapter, and the deduction can in no case exceed the profits of the eligible business |
| (13) | If, owing to close connection with another person or any other reason, business between them is so arranged as to produce more than the ordinary profits expected, the Assessing Officer takes the amount of profits reasonably deemed to have been derived |
| (14) | Where that arrangement involves a specified domestic transaction under section 164, the profit from it is determined having regard to the arm's length price as defined in section 173(a) |
For the transfer pricing provisions around sections 164 and 173, see the live note on transfer pricing (section 161).
Example (invented). A start-up's eligible business sells goods worth Rs. 10,00,000 in the open market to another business of the same assessee, but records the transfer at Rs. 8,00,000. Under sub-section (9), profits of the eligible business for the deduction are computed as if the transfer had been made at Rs. 10,00,000.
Section 140(15) and (16): the power to withdraw and the definitions
Sub-section (15). The Central Government may, after such inquiry as it thinks fit, direct by notification that the exemption conferred by the section does not apply to any class of industrial undertaking or enterprise with effect from a date it specifies. Any such notification is not in the text consulted.
Sub-section (16).
| Term | Meaning |
|---|---|
| Eligible business | A business carried out by an eligible start-up engaged in innovation, development or improvement of products or processes or services, or a scalable business model with a high potential of employment generation or wealth creation |
| Eligible start-up | A company or limited liability partnership engaged in eligible business which fulfils: (i) it is incorporated on or after the 1st April, 2016 but before the 1st April, 2030; (ii) the total turnover of its business does not exceed three hundred crore rupees in the tax year relevant to the tax year for which deduction under sub-section (1) is claimed; and (iii) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification as may be notified by the Central Government |
| Limited liability partnership | A partnership referred to in section 2(1)(n) of the Limited Liability Partnership Act, 2008 |
The word "three" in clause (b)(ii) is printed as substituted by the Finance Act, 2026, with effect from 1 April 2026. The notification of the Board is not in the text consulted.
Where this section links to others
Section 119(3)(b) gives an eligible start-up referred to in section 140 a separate test for carrying forward losses despite a change in shareholding; see our article on sections 119 and 120. Section 143 applies sub-sections (4), (5) and (6) and (7) to (15) of section 140 to certain undertakings; see sections 143 to 145. Section 146 refers to section 140(4); see the article on section 146.
Need help claiming the start-up deduction?
The start-up deduction depends on the certificate, the incorporation window, the audit report and the year you choose. Our tax planning advisory team can help you test each condition and plan which three years to claim.
Key takeaways
- The deduction is hundred per cent of profits from eligible business for any three consecutive tax years out of the ten years from incorporation.
- An eligible start-up is a company or LLP incorporated on or after 1 April 2016 but before 1 April 2030, with turnover not above three hundred crore rupees and a certificate of eligible business.
- The start-up must not be formed by splitting up or reconstruction, or by transfer of previously used machinery or plant (subject to the 20% allowance and the import rule).
- The accounts must be audited before the specified date in section 63.
- Transfers between businesses are valued at market value for computing the profits.
Read next
- Sections 141–142: certain industrial undertakings and housing projects
- Sections 138–139: infrastructure undertakings and SEZ developers
- Section 63: tax audit
- Income-tax Act 2025 Chapter VIII
Disclaimer: Based on the Income-tax Act, 2025 (30 of 2025) as amended by the Finance Act, 2026, as consulted on 2 October 2026. It explains the words of the Act only; the Income-tax Rules, 2026, notifications, circulars, later amendments and the way the tax authorities and courts apply these provisions should be checked. This article is general information, not legal advice; check the official text before acting.