What is the Section 115BAA New Tax Rate for Domestic Companies in India?
- PRITI SIRDESHMUKH
- Oct 6
- 7 min read
Section 115BAA offers domestic enterprises lower tax rates, which will be in effect for FY 2019–20. A 22% tax rate reduction is provided by Section 115BAA, along with a 10% fee and a 4% education cess. Businesses that choose Section 115BAA will essentially be subject to 25.17% tax. The government introduces new tax laws every year. On September 20, 2019, Section 115BAA was introduced, which lowered the tax rate for companies doing business in India. The MAT rate was also reduced from 18.5% to 15%. Section 115BAA was more about creating an atmosphere conducive to business, encouraging investment, and stimulating economic growth than it was about numbers.
Table of Contents
What is Section 115BAA?
In India, a business typically pays a flat 30% tax. However, under section 115BAA, businesses that meet specific requirements can choose a concessional tax rate. Section 115BAA was added to the Income Tax Act of 1961. It lowers the corporate tax rate for domestic businesses. The section states that domestic companies may elect to pay taxes at the rate of 22% plus a 4% cess and a 10% surcharge. The effective tax rate will be 25.17% starting in FY 2019–20 (AY 2020–21) if these domestic businesses meet the requirements. In the past, all domestic businesses doing business in India were required to pay a flat 30% tax. Additionally, the current 18.5% MAT rate has been lowered to 15%.
Features of Section 115BAA
The following are some salient characteristics of Section 115BAA of the Income Tax Act:
Lower Tax Rate: Indian businesses can now choose to pay corporate tax at a lower rate of 22%. It includes a 10% surcharge and a 4% cess. This lowers the overall effective tax rate from 30% to 25.17%.
Exemption From MAT: Businesses that choose this option are not required to pay any Minimum Alternate Tax (MAT).
Reduced MAT Rate: The MAT rate was reduced from 18.5% to 15% by the amendment.
Flexibility: Businesses can choose to withdraw from the concessional tax regime and return to the prior tax arrangement if they so desire.
Eligibility Criteria for Section 115BAA
Under the following circumstances, all domestic businesses will be able to pay income tax at the rate of 22% (plus any relevant surcharge and cess). These businesses shouldn't take advantage of any exclusions or incentives offered by various income tax regulations. As a result, the entire revenue of the business will be calculated without.
Claiming any deductions specifically permitted by section 10AA for units located in special economic zones
In the states of Andhra Pradesh, Bihar, Telangana, and West Bengal, claiming additional depreciation under section 32 and investment allowance under section 32AD for new machinery and plant constructed in designated backward regions
Companies that manufacture tea, coffee, and rubber may claim a discount under section 33AB.
Deduction for deposits paid to a site rehabilitation fund under section 33ABA by Indian enterprises that extract or produce natural gas, petroleum, or both.
Claiming a Section 35 deduction for money spent on scientific research or for money given to an IIT, National Laboratory, research association, or university.
Section 35AD allows any designated business to claim a deduction for capital expenditures.
Making a claim for a deduction for funds used for an agriculture extension project under section 35CCC or a skill-development project under section 35CCD
Claiming a deduction under chapter VI-A for specific incomes that are permitted under sections 80IA, 80IAB, 80IAC, 80IB, and so forth—except for deductions under sections 80JJAA and 80M.
Claiming a deduction under Chapter VI-A for specific incomes that are permitted under Sections 80IA, 80IAB, 80IAC, 80IB, and so forth, apart from Section 80JJAA
Claiming a set-off of any depreciation or loss carried forward from prior years, if those losses were related to the previously indicated deductions
A merged business's claim to set off any carried forward loss or unabsorbed depreciation that belongs to the merging company, provided that the loss or unabsorbed depreciation results from the deductions. It also includes a claim for additional/accelerated depreciation. It is possible to claim the normal depreciation, though.
If the business chooses 115BAA, the chance to claim setoff is permanently gone because the losses will be considered to have been permitted and will not be available for carryover and setoff in other years.
These businesses must use this option in order to be subject to section 115BAA taxation before the deadline for submitting income tax returns, which is typically September 30 of the assessment year. Section 115BAA cannot be revoked once the corporation has chosen to use it in a given fiscal year.
According to the CBDT's notification, the choice needs to be on Form 10-IC. Either an electronic verification code or a digital signature should be used to submit the form online.
When to Choose Section 115BAA
A reduced tax rate is one advantage of section 115BAA, but it's crucial to comprehend the following to make sure it's the best course of action for the company's total financial needs:
The deadline for filing returns: Companies should decide before the income tax return filing deadline. It is usually September 30 of the applicable assessment year to take advantage of the 25.17% concessional tax rate.
Irrevocability and Finance Strategy: Selecting Section 115BAA gives you the option to pay taxes at the lower rate, but your decision is final. It is crucial to realise that the choice made aligns with the company's objectives.
Reductions and Depreciation: It is crucial to keep in mind that section 115BAA prohibits the set-off of losses and unabsorbed depreciation related to specific deductions. Therefore, it is preferable to balance the potential tax savings from using losses and depreciation under the previous system against the advantage of a concessional tax rate.
Examining Present and Prospective Income Estimates: A lower tax rate would be advantageous if a business anticipates stability or a rise in profits in the future. Contrary to this, it would be advantageous to maintain the current tax system if the business believes that specific deductions will eventually lower the total tax outlay.
Tax Rates under Section 115BAA
The table below shows the tax structure of a business that chooses section 115BAA:
Particulars
| Rate
| Additional Information, if any
|
|---|---|---|
Base Tax | 22% | Taxed uniformly regardless of income level. Income from the business that is subject to special rates of taxation, such as long-term capital gains, would be subject to special rates rather than 22%. |
Surcharge | 10% | Surcharge is applicable on base tax in all situations, not just in case of high income |
Cess | 4% |
The sum of the aforementioned three yields an effective tax rate of 25.168%.
Tax Rates for Domestic Companies under Section 115BAA
The following table lists the various tax rates for domestic businesses in AY 2025–2026:
Conditions for domestic companies
| Income tax Rate (Excluding cess)
|
Previous year's turnover or gross revenue is less than Rs. 400 crores | 25% |
Domestic Manufacturing companies opt for tax payment as per section 115BA | 25% |
Certain Domestic Companies opt for tax payment as per section 115BAA | 22% |
The company opts for tax payment as per section 115BAB | 15% |
Other domestic companies | 30% |
Normal Tax Rates vs Tax Rates under Section 115BAA
The tax rates with and without section 115BAA are contrasted in this table:
Total Income
| Effective Tax rate for companies choosing Section 115BAA (including surcharge and education cess)
| Effective Tax rate for companies not choosing Section 115BAA (including surcharge and education cess)
|
Less than Rs. 1 Crore | 25.17% | 26% |
Rs.1 Crore- Rs. 10 Crore | 25.17% | 27.82% |
More than 10 Crore | 25.17% | 29.12% |
For businesses choosing to use section 115 BAA, the surcharge rate is a fixed 10%, regardless of overall revenue.
For businesses with total incomes over one crore but under ten crore, the surcharge rate is 7%. For businesses with total incomes over ten crore, it is 12%.
An additional 4% of the health and education cess is added to the income tax and applicable surcharge.
Conclusion
The Income Tax Act of 1961's Section 115BAA is a major step in making taxes easier for Indian businesses. This part seeks to improve the business climate by providing a lower tax rate and exemptions. It will stimulate investment and economic growth. However, corporations must carefully examine the benefits and implications of choosing this section, including variables like qualifying criteria, loss of deductions, and irreversibility of the decision. In the end, making well-informed judgements that align with their long-term objectives requires careful consideration of Section 115BAA and smart financial planning.
Frequently Asked Questions
What is Section 115BAA?
Section 115BAA was added to the Income Tax Act of 1961 so that domestic enterprises might benefit from a lower corporate tax rate. According to Section 115BAA, domestic businesses can choose to pay tax at a rate of 22% plus a 10% surcharge and a 4% cess.
Can a foreign company opt for Section 115BAA?
No, the tax rates listed in Section 115BAA are not available to foreign corporations.
Which corporations can opt for Section 115BAA?
The lower tax rates offered in this section are only available to domestic businesses that satisfy the eligibility requirements. The benefits of lower tax rates under Section 115BAA are not available to partnership firms, individuals, foreign corporations, LLPs, AOPs, or BUIs.
Can a domestic company opt out of Section 115BAA?
Domestic businesses can choose to benefit from the lower tax rate when their tax holiday period or exemptions/incentives expire if they don't wish to do so immediately. However, the decision made by a business to use the lower tax rate under Section 115BAA of the Income Tax Act 1961 is final and cannot be altered later.
Is it mandatory for all applicable taxpayers to file Form 10-IC?
No. This is not required. Form 10-IC must only be submitted when a Domestic Company chooses to pay tax under Section 115BAA of the Income Tax Act, 1961, at a concessional rate of 22% (excluding surcharge and cess).
Can a company opt for Section 115 BAA from any assessment year?
Yes, a company may decide to use section 115 BA in any assessment year starting in AY 2020–21.
Can a company set off brought forward losses and unabsorbed depreciation when opting for Section 115BAA?
Any carried forward depreciation (extra depreciation) for the assessment year in which the option was exercised and subsequent assessment years cannot be set off by the domestic firm choosing § 115BAA. The unabsorbed portion of the depreciation from previous years cannot be used now since they are unable to claim extra depreciation.
How do you opt for Section 115BAA?
You can choose Section 115BAA of the Income Tax Act, 1961, online in accordance with Rule 21AE.
Can a taxpayer utilise MAT credits if the Section 115BAA option is exercised?
Domestic businesses that choose section 115BAA will not be eligible to receive MAT credits for taxes paid during the tax holiday period under MAT. Section 115BAA would prevent the corporations from using MAT credits to reduce their tax payments.
Do I need to file the form again for the next AY?
No, once you choose a concessional tax rate, it will follow you into future assessment years and cannot be taken away.
