Direct Tax Laws and International Taxation · Different Aspects of Tax Planning

Tax Planning for a New Business and Location Decisions

Updated 11 October 2026 · Fact-checked

Tax planning for a new business means choosing the form of organisation, location and nature of business that lawfully lowers tax over the life of the business. You compare the tax cost of each option, check eligibility for incentives such as the start-up deduction in section 140, and recommend the option with the lowest total cost.

Understand Tax Planning for New Business and Location Decisions

Tax planning at the start is the cheapest planning you will ever do. Once a business is set up, changing its form or location triggers cost and sometimes tax. So you look at tax before you decide, not after.

Three choices drive the tax result. Form of organisation: sole proprietor, partnership firm, LLP, company. Location: where the unit is set up, which can bring area-based incentives, but also a different residential status risk if there is a foreign link. Nature of business: what the business does, because some activities get special deductions or special rates.

Tax planning is legal. It uses choices the law gives you. It differs from tax avoidance (a device that defeats the intent of the law) and tax evasion (illegal concealment). Always keep your plan on the right side of that line and say so in your answer.

Tax is not the only factor. Liability, funding, compliance cost, control and exit also matter. A good answer compares the tax cost first, then adds a short non-tax note and gives a clear recommendation.

The key incentive for new ventures in the Income-tax Act, 2025 is section 140 (start-ups). It gives a 100% deduction of profits from an eligible business for three consecutive tax years, chosen out of ten years from incorporation. Only a company or an LLP can be an eligible start-up, so it directly affects the choice of form.

Key rules to remember

Section 140 deduction: Deduction = 100% × profits and gains derived from the eligible business, for any 3 consecutive tax years out of 10 years from the year of incorporation; Claimed at the assessee's option. Profits of the eligible business only, and the deduction cannot exceed those profits.
Eligible start-up: Company or LLP + incorporated on or after 1 April 2016 but before 1 April 2030 + turnover not above ₹300 crore + certificate from the Inter-Ministerial Board; The turnover limit applies in the tax year relevant to the year of claim. Sole proprietors, partnership firms and others do not qualify.
Eligible business: Innovation, development or improvement of products, processes or services, or a scalable business model with high potential for employment generation or wealth creation; The start-up must be engaged in this business.
Conditions on formation: Not formed by splitting up or reconstruction of an existing business; not formed by transfer of previously used plant or machinery; Previously used plant transferred is ignored if its value is within 20% of the total value of plant and machinery used in the business. Imported plant used only abroad by another person, never used in India and with no depreciation allowed, is not treated as previously used.
Transfer between businesses: Goods or services transferred between the eligible business and another business of the assessee are taken at market value; This stops profit shifting into the deduction-eligible business. For specified domestic transactions, arm's length price applies.
No double deduction: Profits allowed under section 140 cannot be deducted again under other provisions of Part C of the Chapter; Total deduction cannot exceed the profits of the eligible business.
Audit condition: Accounts audited and audit report in prescribed form furnished by the specified date under section 63; Without this, the deduction is not admissible.

How to solve Tax Planning for New Business and Location Decisions questions

Use this method for any case on setting up a new business or choosing a location. It keeps the answer structured and ends with a recommendation.

1List the options in the question: forms of organisation, locations or types of business.
2Note the facts that affect tax: expected profit, turnover, owners, date of incorporation, whether the business is new or formed from an existing one, and the nature of activity.
3Check incentive eligibility for each option. For a start-up, test each condition of section 140: company or LLP, incorporation window, turnover, certificate, and no split-up or used plant.
4Compute the tax cost of each option over the relevant period, using the rates that apply to that form. Include the benefit of any deduction.
5Add non-tax points briefly: liability, funding, compliance and audit cost, control.
6Recommend one option with a one-line reason, and state that the plan uses lawful choices and not avoidance.

Quickest way: Eligibility checklist, then compare

When to use it: Use when a short MCQ or a 14-mark case asks whether a new business can claim the start-up deduction or which form is better.

Ask first: is it a company or an LLP? If not, section 140 is out.
Check the dates: incorporated on or after 1 April 2016 and before 1 April 2030.
Check turnover is not above ₹300 crore and a board certificate exists.
Check it is not a split-up or built on old plant (20% tolerance).
If all pass, deduction is 100% for 3 consecutive years of your choice within the first 10. Then compare tax cost with the alternative and recommend.

Common mistakes in Tax Planning for New Business and Location Decisions

Allowing section 140 to a partnership firm or proprietor.
Students remember 'start-up' and forget the entity condition.
Fix: Only a company or an LLP engaged in eligible business can be an eligible start-up. A partnership firm cannot.
Giving the deduction for the first three years automatically.
Students assume the years are fixed.
Fix: The assessee chooses any three consecutive tax years out of ten years starting from the year of incorporation.
Using the old turnover limit of ₹100 crore.
Older material is still in circulation.
Fix: The text supplied for tax year 2026-27 gives a limit of three hundred crore rupees. Use ₹300 crore.
Treating any transfer of old machinery as disqualifying.
Students read only the condition and skip the exception.
Fix: Transfer of previously used plant is ignored if its value is not more than 20% of the total plant and machinery value in the business.
Ignoring the audit requirement and the certificate.
Focus stays on the rate and the years.
Fix: Mention the Inter-Ministerial Board certificate and the audit report by the specified date as conditions for the claim.
Recommending a form on tax alone, or calling a sham arrangement tax planning.
Students treat the question as pure arithmetic.
Fix: State the tax comparison, add a short non-tax note, and keep to lawful choices. Do not suggest splitting a business only to claim the deduction.

Worked examples

Example 1

Nova Tech Private Limited was incorporated on 10 August 2024 and makes software for rural logistics. It holds the Inter-Ministerial Board certificate. Its turnover is ₹40 crore in each year. It was set up fresh with new machinery. Can it claim a deduction under section 140, and for how long?

Show the solution

Form: it is a company, so the entity test is met.
Date: incorporated 10 August 2024, which is on or after 1 April 2016 and before 1 April 2030. Met.
Turnover: ₹40 crore does not exceed ₹300 crore. Met.
Certificate: held from the Inter-Ministerial Board. Met.
Business: software for logistics is innovation or development of products or services, so it is eligible business.
Formation: set up fresh with new machinery, so it is not a split-up and not built on previously used plant.
Period: it may choose any three consecutive tax years out of ten years starting from the year of incorporation.
Conditions: accounts must be audited and the report furnished by the specified date under section 63.

Answer: Yes. Nova Tech can claim a 100% deduction of profits from the eligible business for any three consecutive tax years of its choice within the ten years from the year of incorporation, subject to the audit report being furnished on time.

Example 2

Mehta & Sons, a partnership firm, plans to start a new venture making smart meters, with expected annual profit of ₹60,00,000. The partners ask whether they should instead form a company to use section 140. Advise on the tax position only.

Show the solution

Section 140 is available only to an eligible start-up, which must be a company or an LLP.
A partnership firm is not eligible, so the firm gets no deduction under this section.
If a new company or LLP is incorporated (on or after 1 April 2016 and before 1 April 2030), holds the board certificate and has turnover within ₹300 crore, the venture could qualify.
The venture must be a genuinely new business. It must not be formed by splitting up or reconstructing the firm's existing business.
Plant and machinery moved from the firm's existing business must be within 20% of the total plant and machinery value used in the new business, otherwise the condition fails.
Illustration: if the profit of ₹60,00,000 qualifies in each of three chosen years, the deduction is 100% of ₹60,00,000 = ₹60,00,000 a year, so the profit from the venture is exempt from tax in those years.
Non-tax points: a company or LLP gives limited liability but brings more compliance and an audit requirement.

Answer: The firm itself cannot claim section 140. A separate new company or LLP that meets the incorporation date, turnover, certificate and fresh-formation conditions can claim 100% of its eligible profits, for example ₹60,00,000 a year, for three chosen consecutive years. Recommend it only if the venture is truly new and not carved out of the firm's existing business.

Exam tips

Write the section 140 conditions as a short list. Examiners reward each condition tested against the facts.
Always state the numbers exactly: 100%, three consecutive years, ten years, 1 April 2016 to before 1 April 2030, ₹300 crore, 20%.
In case questions, end with a clear recommendation and one line on non-tax factors.
Watch for traps in the facts: a firm or proprietor, a split-up of an old business, or old machinery above 20%.
Use the term tax planning for lawful choices. Do not describe artificial arrangements as planning.

Practice questions from Different Aspects of Tax Planning

Tax Planning for New Business and Location Decisions in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CS ProfessionalTax Planning for Setting Up a New Business

Tax Planning for New Business and Location Decisions: frequently asked questions

Can a partnership firm claim the start-up deduction under the Income-tax Act, 2025?

No. Under section 140, only an eligible start-up, which is a company or an LLP, can claim it. A firm would need to plan through a new company or LLP if it wants the benefit.

Which three years can a start-up choose for the deduction?

Any three consecutive tax years out of the ten years beginning from the year in which the start-up is incorporated. The choice is at the option of the assessee.

Does a start-up with old machinery lose the deduction?

Not always. If previously used plant transferred to the new business does not exceed 20% of the total value of plant and machinery used, the condition is treated as met. Imported plant meeting the stated conditions is also not treated as previously used.

Is choosing the form of business for lower tax legal?

Yes, when you use choices the law gives and the arrangement has real business substance. It becomes avoidance or evasion if it is artificial or conceals income.