Section 79
The loss carryforward restriction that triggers when a company changes beneficial ownership by more than 51%. DPIIT-recognised startups have a 7-year exemption — relevant before every funding round.
Section 79 of the Income Tax Act restricts a company from carrying forward tax losses from previous years when its beneficial ownership changes by more than 51%. The practical effect: if new investors take control and the original shareholder base effectively exits, the accumulated losses — which could have offset future profits — are disallowed.
For most companies this creates a significant constraint around fundraising. For DPIIT-recognised startups, a specific exemption applies for losses incurred in the first 7 years.
Who it applies to
- All companies (not LLPs, which have different carryforward rules)
- Triggered in any year where the shareholders who held 51%+ voting power on the last day of the loss year no longer hold those shares
- The startup exemption applies to DPIIT-recognised companies for losses incurred within the first 7 years of incorporation
The startup exemption — and its condition
DPIIT-recognised startups can carry forward early losses across ownership changes, subject to one condition: all shareholders who held shares at the end of the year in which the loss was incurred must still hold those shares at the end of the year the loss is being claimed.
This condition is easier to satisfy in some transactions than others:
| Transaction type | Section 79 outcome |
|---|---|
| Primary round (new shares to investors, founders retain their shares) | Condition typically met — founders still hold their original shares |
| Secondary sale (founders sell existing shares to investors) | Condition broken — founders no longer hold those shares |
| Founder buys out another founder''s shares | Condition broken for the selling founder''s shares |
What most founders miss
Most founders discover Section 79 mid-round when their CA flags the carryforward risk. Understanding it early allows the round to be structured to preserve losses — for example, limiting secondary components or ensuring no original shareholder fully exits.
The startup exemption applies only to losses incurred in the first 7 years from incorporation. Losses incurred after Year 7 are subject to the standard Section 79 rules regardless of DPIIT recognition status.
The 7-year exemption covers the loss-incurrence year, not the claim year. A startup that incurred losses in Year 3 and is now in Year 9 can still claim the benefit on those Year 3 losses — the exemption is anchored to when the loss arose, not when it is being set off.
If the startup loses its DPIIT recognition during the carryforward period, the exemption status for those losses may be affected — maintain recognition continuously.
See also
- DPIIT Recognition — required for the 7-year Section 79 exemption
- AIF (Alternative Investment Fund) — the entity structure of most VC investors; round structure affects Section 79 outcome
- Section 80-IAC — the tax holiday that creates the profits Section 79 losses would eventually offset
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