Professional note

Tax regimes available to companies in India

Sayed Shaikh & Associates · Written September 2026 · Law as amended up to the Finance Act, 2025

A domestic company pays tax under one of three regimes. The choice is made in the return, and for two of the three it cannot be reversed. This note sets out what each regime charges, what each requires, and the considerations that usually decide the question.

The three regimes at a glance

1. The normal regime

The rate is 25% where the company's total turnover or gross receipts in the financial year two years earlier did not exceed ₹400 crore, and 30% otherwise. Surcharge is 7% where total income exceeds ₹1 crore and 12% where it exceeds ₹10 crore, and health and education cess of 4% applies on the tax and surcharge. The effective rate therefore runs from 26.00% for a smaller company with no surcharge to 34.94% for a larger one at the top surcharge.

Every deduction and incentive the Act offers is available: additional depreciation on new plant and machinery, the investment-linked deduction under section 35AD, weighted deductions for scientific research, the deduction for units in Special Economic Zones under section 10AA, and the deductions of Chapter VI-A. Brought-forward losses and unabsorbed depreciation are set off without restriction.

Minimum alternate tax under section 115JB applies at 15% of book profit. Where MAT exceeds the tax computed on total income, the excess is paid as MAT and carried forward as credit for fifteen years, to be set off in a later year when normal tax exceeds MAT.

2. Section 115BAA — the 22% regime

Introduced by the Taxation Laws (Amendment) Act, 2019 with effect from assessment year 2020-21, this regime is open to any domestic company. The rate is 22%, surcharge is a flat 10% regardless of income, and cess is 4%, giving an effective rate of 25.17%.

The price of the lower rate is that total income must be computed without the following:

• the deduction for SEZ units under section 10AA;
• additional depreciation under section 32(1)(iia);
• the deductions under sections 33AB and 33ABA;
• the deductions for scientific research under sections 35(1)(ii), (iia) and (iii), 35(2AA) and 35(2AB);
• the investment-linked deduction under section 35AD, and the deductions under sections 35CCC and 35CCD;
• every deduction under Chapter VI-A, except those under sections 80JJAA (new employment), 80M (inter-corporate dividends) and 80LA (units in an International Financial Services Centre);
• set-off of any brought-forward loss or unabsorbed depreciation to the extent it is attributable to the deductions above, including such loss or depreciation inherited from an amalgamating company.

Ordinary depreciation under section 32 remains available. Minimum alternate tax does not apply, and this has a consequence that is easy to miss: MAT credit brought forward from earlier years lapses on opting in and cannot be set off against tax under this regime. For a company carrying substantial credit, that alone often settles the matter.

The option is exercised in Form 10-IC on or before the due date for the return under section 139(1). Once exercised it applies to that year and every subsequent year, and cannot be withdrawn.

3. Section 115BAB — 15% for new manufacturing companies

Introduced by the same Amendment Act, this regime charges 15%, with a flat 10% surcharge and 4% cess, giving an effective rate of 17.16%. It is confined to a domestic company that satisfies all of the following:

• set up and registered on or after 1 October 2019;
• commenced manufacture or production of an article or thing on or before 31 March 2024;
• not formed by splitting up or reconstructing a business already in existence;
• does not use plant or machinery previously used in India, save that used machinery up to 20% of the total value of plant and machinery is permitted, and imported machinery that has not been used in India is permitted;
• does not use a building previously used as a hotel or convention centre for which a deduction under section 80-ID was claimed;
• is not engaged in any business other than manufacture or production and research or distribution in relation to it. Software development, mining, conversion of marble blocks, bottling of gas, printing of books, production of cinematograph film and any other activity notified are expressly excluded from "manufacture" for this purpose.

The same deductions are given up as under section 115BAA. Income that does not arise from manufacturing, such as interest, is taxed at 22%, and short-term capital gains on assets on which no depreciation is allowable are also taxed at 22%. Where the company's dealings with a connected person are arranged so as to produce more than ordinary profits, the Assessing Officer may compute a reasonable profit under sub-section (6), a provision that operates as a domestic transfer pricing rule.

The option is exercised in Form 10-ID with the first return, and is irrevocable. Since the window for commencing manufacture closed on 31 March 2024, a company formed today cannot opt into this regime. Companies that met the conditions in time continue on it.

4. Foreign companies

A foreign company is taxed at 35% on income chargeable in India, the rate having been reduced from 40% by the Finance (No. 2) Act, 2024. Surcharge is 2% above ₹1 crore and 5% above ₹10 crore, with 4% cess, giving effective rates of 36.40%, 37.13% and 38.22%. Sections 115BAA and 115BAB are not available to foreign companies. Specific streams of income, such as royalties, fees for technical services and interest, are charged at the rates prescribed for them, subject to any lower rate under an applicable tax treaty.

5. Making the choice

The question is rarely the headline rate. It is what is given up to reach it.

A company usually does better to remain on the normal regime, at least for the present, where one or more of the following holds:

• it carries substantial MAT credit, which would lapse;
• it has large brought-forward losses attributable to the specified deductions, which could not be set off;
• a deduction under section 10AA or section 35AD is still running;
• additional depreciation on recent capital expenditure is significant.

Where none of these applies, or once they are exhausted, section 115BAA generally produces the lower liability, and the absence of MAT simplifies the computation. Because the option may be exercised in any year, a company can remain on the normal regime while it runs down its MAT credit and deductions, and move to section 115BAA thereafter. The reverse is not possible: once the option is exercised, the company cannot return.

The usual basis for the decision is a computation over the remaining life of the credit and the deductions, comparing the total tax under each course. The year in which the switch produces the lower cumulative liability is the year to exercise the option.