Startup Tax Holiday Under Section 140 (Earlier 80-IAC): Why MAT Is Now a Final Cost
From tax year 2026-27, a startup company that claims the three-year tax holiday still pays MAT at 14% of book profit - and no longer gets it back. Here is what changed, what the holiday is still worth, and how to plan around it.
For a DPIIT-recognised startup, the Inter-Ministerial Board certificate for the tax holiday is a milestone worth framing. But the holiday removes only normal income tax. A profitable startup company still pays Minimum Alternate Tax (MAT) on its book profit - and since 01.04.2026, that MAT is no longer a prepayment that comes back as credit. It is the final tax.
What the Startup Tax Holiday Gives
The startup tax holiday, known for years as Section 80-IAC of the Income-tax Act, 1961, is now Section 140 of the Income-tax Act, 2025. It allows an eligible startup a deduction of 100% of the profits of its eligible business for any three consecutive tax years out of the first ten years from incorporation.
Eligibility Under Section 140
- The entity is a private limited company or an LLP, incorporated on or after 01.04.2016 and before 01.04.2030
- Turnover does not exceed ₹300 crore in the tax year for which the deduction is claimed - raised from ₹100 crore by the Finance Act, 2026 with effect from 01.04.2026
- It holds a certificate of eligible business from the Inter-Ministerial Board (IMB). DPIIT recognition alone is not enough - the IMB certificate needs a separate application
- The business is engaged in innovation, development or improvement of products, processes or services, or a scalable business model with high potential for employment or wealth creation
- It is not formed by splitting up or reconstructing an existing business, or by transferring used plant and machinery (subject to a 20% allowance)
Looking up the new section number for any old provision? Our Income Tax Section & Form Mapping Tool maps 80-IAC to Section 140 and covers every other 1961 section and form.
Why the Holiday Never Meant Zero Tax for Companies
MAT is charged on book profit - the profit shown in the company's financial statements, with prescribed adjustments - whenever the normal income tax is lower than MAT. The Section 140 deduction reduces taxable income, but it does not reduce book profit. So in a holiday year, normal tax is nil and MAT becomes payable on the full book profit.
This has always been the case. What has changed is what happens to that MAT afterwards.
What the Finance Act, 2026 Changed
The Finance Act, 2026, enacted on 30.03.2026, restructured MAT under Section 206 of the Income-tax Act, 2025 (which carries what was Section 115JB). For tax year 2026-27 onwards:
| Particulars | Up to FY 2025-26 | From Tax Year 2026-27 |
|---|---|---|
| MAT rate on book profit | 15% | 14% |
| Excess of MAT over normal tax | Became MAT credit, usable later | Final tax - no new credit |
| Use of credit built up till 31.03.2026 | Against normal tax in later years | Only after opting for the concessional regime (Section 200 or 201), capped at 25% of tax payable each year, within 15 years |
Under the old framework, the holiday was really two things: an exemption from tax and a deferral of MAT. A startup paid MAT during the holiday, then used the credit to reduce normal tax once the holiday ended. Much of the MAT came back. From tax year 2026-27, it does not.
MAT at 14% plus surcharge and cess is payable on book profit.
The excess became credit, set off against normal tax after the holiday ended.
No credit is created. What is paid during the holiday is a permanent cost.
Why Not Just Move to the 22% Regime?
Section 200 (earlier Section 115BAA) lets a domestic company pay tax at 22% with no MAT. But it requires the company to give up specified deductions - and Section 140 is one of them. A startup cannot claim the holiday and the concessional rate together. Section 201 (the 15% rate for new manufacturing companies) has been closed to new entrants since 31.03.2024, so for a new startup the real alternative is Section 200.
How the Effective Rates Are Worked Out
The headline rates are only the base. Surcharge is added on the tax, and then 4% health and education cess on the total. Under the holiday, MAT is the tax the company actually pays, and from tax year 2026-27 it is final with no credit.
| Option and Profit Level | Base Rate | Surcharge | Cess | Effective Rate |
|---|---|---|---|---|
| Section 140 holiday - MAT, profit up to ₹1 crore | 14% | Nil | 4% | 14.56% (14 × 1.04) |
| Section 140 holiday - MAT, ₹1 crore to ₹10 crore | 14% | 7% | 4% | 15.58% (14 × 1.07 × 1.04) |
| Section 140 holiday - MAT, above ₹10 crore | 14% | 12% | 4% | 16.31% (14 × 1.12 × 1.04) |
| Section 200 (22% regime) - any profit level, no holiday | 22% | 10% flat | 4% | 25.17% (22 × 1.10 × 1.04) |
Under Section 200 the surcharge is a flat 10% whatever the income, so 25.17% applies from the first rupee. That is why it is a single figure, while MAT moves with the surcharge band.
What the Holiday Saves
| Profit Level | Tax With Holiday (MAT) | Tax Under Section 200 | Saving on Every ₹100 of Profit |
|---|---|---|---|
| Up to ₹1 crore | ₹14.56 | ₹25.17 | ₹10.61 |
| ₹1 crore to ₹10 crore | ₹15.58 | ₹25.17 | ₹9.59 |
| Above ₹10 crore | ₹16.31 | ₹25.17 | ₹8.86 |
On these numbers, the holiday still saves about ₹9 to ₹11 on every ₹100 of profit in each holiday year. It is smaller than it used to be, because the MAT no longer comes back, but it is not gone.
Example: A Startup Company With ₹5 Crore Profit
Who: A DPIIT-recognised private limited company with an IMB certificate, in its second holiday year. Book profit and business profit are both ₹5 crore. It has no brought-forward losses.
| Particulars | Section 140 + MAT | Section 200 |
|---|---|---|
| Taxable base | ₹500.00 lakh (book profit) | ₹500.00 lakh |
| Tax at base rate | ₹70.00 lakh (14%) | ₹110.00 lakh (22%) |
| Surcharge | ₹4.90 lakh (7%) | ₹11.00 lakh (10%) |
| Health and education cess (4%) | ₹3.00 lakh | ₹4.84 lakh |
| Total tax for the year | ₹77.90 lakh | ₹125.84 lakh |
- Saving from the holiday: about ₹47.94 lakh in this year, or roughly ₹1.44 crore over three holiday years at the same profit.
- What is lost: under the old rules, most of the ₹77.90 lakh would have come back as MAT credit in later years. From tax year 2026-27, none of it does.
- After the holiday: the company can opt for Section 200 from the following year. Once that option is exercised it cannot be withdrawn, so the timing should be planned before the holiday ends.
LLPs Are Treated Differently
The MAT change applies to companies. An LLP claiming the Section 140 holiday falls under Alternate Minimum Tax (AMT) under Section 206(2) instead - 18.5% of adjusted total income, which adds back the holiday deduction. With 12% surcharge above ₹1 crore and 4% cess, that is about 21.55% at the top, against roughly 34.94% normal tax for an LLP at that income level.
Unlike company MAT, AMT paid in excess of normal tax still creates a credit that an LLP can carry forward for 15 tax years and set off when normal tax exceeds AMT. For a startup choosing between incorporating as a company or an LLP, this difference now matters more than it did - though it is only one factor alongside fundraising, ESOPs and investor expectations. Our business setup and startup advisory team can help weigh the structure before you incorporate.
Planning Points for Startup Founders
Before You Choose Your Holiday Years
- Pick the three consecutive years when profit is expected to be highest. The holiday saves the difference between normal tax and MAT, so it is worth most in strong years
- Brought-forward losses help less than you might expect. For MAT, book profit is reduced only by the lower of brought-forward loss and unabsorbed depreciation as per books - and by nothing if either is nil
- Model both options every year: Section 140 with MAT, and Section 200 without the holiday. The answer can change as profit and surcharge bands change
- If the company paid MAT in FY 2025-26 or earlier, that credit survives - but only a move to Section 200 unlocks it, at up to 25% of the tax payable each year. Plan the switch so the credit is used before it lapses
- Budget for MAT in advance tax. A holiday year is not a tax-free year for cash-flow purposes, and interest applies on shortfalls
- Keep the IMB certificate, the accountant's audit report for the deduction and segment-wise profit workings ready - where a company runs more than one business, the eligible business's profit must be computed separately
Frequently Asked Questions
Yes. It continues as Section 140 of the Income-tax Act, 2025, with the same 100% deduction for three consecutive years out of ten. The incorporation window runs to 31.03.2030, and the turnover ceiling is now ₹300 crore.
Yes, if it has book profit. The deduction reduces taxable income but not book profit, so MAT at 14% plus surcharge and cess becomes payable in a profitable holiday year.
Not for tax year 2026-27 onwards. The Finance Act, 2026 made MAT a final tax for companies in the regular regime, so no new MAT credit is created. Credit built up till 31.03.2026 survives, but can be used only after opting for Section 200 or 201.
No. A company opting for Section 200 must give up specified deductions, including Section 140. It is one or the other in any year.
Usually yes. MAT costs about 14.56% to 16.31% of book profit including surcharge and cess, against 25.17% under Section 200 (22% plus 10% surcharge plus 4% cess). That is a saving of about ₹9 to ₹11 on every ₹100 of profit - roughly ₹48 lakh a year on ₹5 crore of profit.
No. MAT applies only to companies. An LLP claiming Section 140 pays Alternate Minimum Tax at 18.5% of adjusted total income plus surcharge and cess, and unlike company MAT, the excess still becomes a credit that can be carried forward for 15 tax years.
No. DPIIT recognition is the first step. The tax holiday needs a separate application and a certificate of eligible business from the Inter-Ministerial Board. Only a small share of recognised startups has received it - over 3,700 since 2017, as of DPIIT's April 2025 approvals.
It is preserved, but a domestic company can use it only after opting for Section 200 or 201, and only up to 25% of the tax payable in each year. Unused credit lapses after 15 tax years from the year it arose. Since opting for Section 200 means giving up Section 140, the switch is usually best timed for after the holiday years.
For return filing timelines and documents, see our ITR Filing Essentials guide. If you are planning a startup's tax position for the coming years, contact us to model your options.