By Dev Rao | Updated March 2026
What Is Concessional Corporate Tax?
Concessional Corporate Tax refers to the reduced tax rates available to domestic companies in India under Section 115BAA and Section 115BAB of the Income Tax Act, 1961, introduced by the Taxation Laws (Amendment) Act, 2019 with effect from Assessment Year 2020-21. Section 115BAA offers a base rate of 22% (effective rate ~25.17% after surcharge and cess) to any domestic company, while Section 115BAB offers a base rate of 15% (effective rate ~17.16%) exclusively to new manufacturing companies incorporated after October 1, 2019.
For foreign investors setting up operations in India through a wholly-owned subsidiary or private limited company, these provisions represent a dramatic reduction from the old regime rate of 30% (effective ~34.94%). India's concessional rates now rank among the most competitive in Asia, directly influencing where multinationals choose to locate their Indian operations. The 2019 reform was specifically designed to attract foreign direct investment and boost the Make in India initiative.
The trade-off is straightforward: companies that opt for concessional rates must permanently surrender a list of specified exemptions, deductions, and incentives. Once the option is exercised by filing the prescribed form (Form 10-IC for Section 115BAA or Form 10-ID for Section 115BAB), it is irrevocable and applies to all subsequent assessment years.
Legal Basis
- Section 115BAA of the Income Tax Act, 1961 — Inserted by the Taxation Laws (Amendment) Act, 2019. Allows any domestic company to pay income tax at 22% (plus 10% surcharge and 4% Health and Education Cess) if it forgoes specified exemptions and deductions. Effective from AY 2020-21.
- Section 115BAB of the Income Tax Act, 1961 — Inserted by the same 2019 Amendment. Allows new domestic manufacturing companies (incorporated on or after October 1, 2019) to pay income tax at 15% (plus 10% surcharge and 4% cess) if they commence manufacturing by March 31, 2024 and forgo specified exemptions.
- Section 115JB (MAT) — Minimum Alternate Tax does not apply to companies opting under Section 115BAA or 115BAB. This is a critical advantage — under the old regime, MAT at 15% of book profits was an additional compliance burden.
- CBDT Notification dated February 14, 2020 — Notified Form 10-IC (for Section 115BAA) and Form 10-ID (for Section 115BAB) as the prescribed forms for exercising the option.
- Finance Act, 2022 — Extended the deadline for commencement of manufacturing under Section 115BAB from March 31, 2023 to March 31, 2024, to accommodate COVID-19-related delays.
Section 115BAA: The 22% Tax Rate for All Domestic Companies
Who Is Eligible?
Any domestic company — whether new or existing, large or small, in any sector — can opt for Section 115BAA. There is no turnover threshold, no incorporation date restriction, and no sector limitation. However, LLPs, foreign companies (including branch offices and liaison offices), and non-corporate entities are not eligible. The company must be incorporated and registered in India under the Companies Act.
Effective Tax Rate Calculation
| Component | Rate | Calculation |
|---|---|---|
| Base tax rate | 22% | On total income |
| Surcharge (flat) | 10% | 10% of 22% = 2.2% |
| Subtotal | 24.2% | 22% + 2.2% |
| Health & Education Cess | 4% | 4% of 24.2% = 0.968% |
| Effective Tax Rate | 25.168% | Rounded to ~25.17% |
The 10% surcharge under Section 115BAA is fixed regardless of the company's total income. Under the old regime, surcharge varies — 7% for income between INR 1 crore and INR 10 crore, and 12% for income exceeding INR 10 crore. This flat surcharge is a significant simplification.
Conditions: What You Must Give Up
Companies opting for Section 115BAA must forgo the following deductions and exemptions:
- Section 10AA — Deduction for units in Special Economic Zones
- Section 32(1)(iia) — Additional (accelerated) depreciation on new plant and machinery. Normal depreciation under Section 32(1)(ii) remains available.
- Section 32AD — Investment allowance for new plant and machinery in notified backward areas
- Section 33AB — Tea, coffee, and rubber development account deductions
- Section 33ABA — Site restoration fund for petroleum and natural gas companies
- Section 35(1)(ii), (iia), (iii), 35(2AA), 35(2AB) — Weighted deductions for scientific research expenditure and contributions to research institutions
- Section 35AD — Capital expenditure deduction for specified businesses (cold chain, warehousing, etc.)
- Section 35CCC and 35CCD — Agricultural extension projects and skill development deductions
- Chapter VI-A deductions — All deductions except Section 80JJAA (employment generation) and Section 80M (inter-corporate dividends)
Additionally, companies cannot set off brought-forward losses or unabsorbed depreciation that are attributable to any of the surrendered deductions listed above.
Section 115BAB: The 15% Tax Rate for New Manufacturing Companies
Who Is Eligible?
Section 115BAB is narrower than 115BAA and has strict eligibility gates:
- The company must be a domestic company incorporated on or after October 1, 2019
- It must be engaged in the manufacture or production of any article or thing (or in research related to such manufacture)
- Manufacturing or production must have commenced on or before March 31, 2024 (extended from March 31, 2023 by the Finance Act, 2022)
- The company must not have been formed by splitting up or reconstruction of a business already in existence (except under Section 33B)
- It must not use second-hand plant or machinery previously used in India, except where the value of such machinery does not exceed 20% of the total value of plant and machinery
- It must not engage in specified non-manufacturing activities: development of computer software, mining, conversion of marble blocks, bottling of gas, printing of books, production of cinematograph film, or any other business notified by the government
Effective Tax Rate Calculation
| Component | Rate | Calculation |
|---|---|---|
| Base tax rate | 15% | On total income |
| Surcharge (flat) | 10% | 10% of 15% = 1.5% |
| Subtotal | 16.5% | 15% + 1.5% |
| Health & Education Cess | 4% | 4% of 16.5% = 0.66% |
| Effective Tax Rate | 17.16% | 15% + 1.5% + 0.66% |
The 115BAB conditions mirror those of 115BAA (same list of surrendered deductions) with the additional manufacturing-specific requirements listed above. The company must file Form 10-ID electronically before the due date for furnishing the return of income for the first assessment year in which the option is exercised.
Complete Comparison: All Corporate Tax Rate Options
India now has multiple corporate tax regimes running in parallel. Choosing the right one is a strategic decision for any foreign-invested company entering India.
| Regime | Base Rate | Surcharge | Cess | Effective Rate | MAT Applicable? | Who Can Opt? |
|---|---|---|---|---|---|---|
| Old Regime (turnover ≤ INR 400 crore) | 25% | 7%/12% | 4% | ~26.00%-29.12% | Yes (15%) | Any domestic company |
| Old Regime (turnover > INR 400 crore) | 30% | 7%/12% | 4% | ~31.20%-34.94% | Yes (15%) | Any domestic company |
| Section 115BAA | 22% | 10% (flat) | 4% | ~25.17% | No | Any domestic company (forgo deductions) |
| Section 115BAB | 15% | 10% (flat) | 4% | ~17.16% | No | New mfg. cos. (inc. after Oct 2019, production by Mar 2024) |
| Foreign Company | 40% | 2%/5% | 4% | ~41.60%-43.68% | Yes (15%) | Foreign companies with India income |
The contrast is stark: a foreign parent operating through an Indian subsidiary under Section 115BAB pays an effective rate of 17.16%, compared to 43.68% if it operates as a foreign company with a permanent establishment. This differential alone justifies the cost of incorporating an Indian subsidiary for manufacturing operations.
The Irrevocable Option: Form 10-IC and Form 10-ID
Form 10-IC (Section 115BAA)
A domestic company exercising the option under Section 115BAA must file Form 10-IC electronically on the Income Tax e-Filing Portal, verified with a digital signature certificate, on or before the due date for filing the income tax return under Section 139(1) — typically October 31 for companies requiring audit. Once filed, the option is permanent. The company cannot withdraw from Section 115BAA in any subsequent assessment year.
Form 10-ID (Section 115BAB)
New manufacturing companies opting for the 15% rate must file Form 10-ID before the due date for furnishing the return of income for the first assessment year in which the option is exercised. Like Form 10-IC, once exercised, the option under Section 115BAB is irrevocable.
What Happens If You Miss the Filing Deadline?
CBDT Circular No. 6/2022 clarified that if a company has exercised the option in the income tax return itself (by selecting the applicable section in the ITR form), the option is treated as validly exercised even if Form 10-IC was filed late. Several ITAT decisions have upheld this position, treating the ITR itself as sufficient evidence of intent. However, this is a litigation-prone area — filing the form on time avoids unnecessary disputes.
How This Affects Foreign Investors in India
The concessional tax regime fundamentally changes the math for foreign investors entering India:
Subsidiary Structure Advantage
Sections 115BAA and 115BAB apply only to domestic companies — i.e., companies incorporated in India under the Companies Act. Foreign companies operating through branch offices, liaison offices, or project offices cannot access these rates. This creates a strong incentive for foreign investors to incorporate a wholly-owned subsidiary or joint venture rather than operating through an unincorporated presence.
DTAA Interaction
The concessional rates operate independently of Double Taxation Avoidance Agreements. The treaty rate applies to specific income categories (royalties, fees for technical services, dividends, interest), while Section 115BAA/115BAB applies to business profits of the Indian subsidiary. Foreign investors benefit from both — concessional rates on business income and treaty rates on cross-border payments.
Dividend Repatriation
Post the abolition of Dividend Distribution Tax in April 2020, dividends paid by Indian subsidiaries are taxable in the hands of the shareholder. For a foreign parent company, the dividend withholding rate is 20% under domestic law or the applicable DTAA rate (often 10-15%). The concessional corporate tax rate means more post-tax profits available for dividend distribution, improving the overall return on investment.
Transfer Pricing Considerations
The lower effective rate under 115BAA/115BAB reduces the incentive for profit shifting out of India through aggressive transfer pricing. From a compliance perspective, this is a positive — it reduces the likelihood of transfer pricing disputes with Indian tax authorities.
Common Mistakes
- Opting for 115BAA without analysing carried-forward losses and MAT credit. Companies with substantial MAT credit accumulated under the old regime lose it permanently upon switching to 115BAA, since MAT does not apply under the new regime. A company with INR 5 crore in unused MAT credit should calculate whether the annual tax saving under 115BAA exceeds the value of the lost MAT credit before switching.
- Assuming Section 115BAB is available to any new company that manufactures. The section has a strict sunset — the company must have been incorporated after October 1, 2019 and must have commenced production by March 31, 2024. Companies incorporated in 2025 or later cannot access the 15% rate. Additionally, activities like software development, mining, and bottling are specifically excluded from "manufacturing."
- Not recognising the irrevocable nature of the option. Unlike the personal income tax regime (where individuals could switch between old and new regimes annually), the corporate concessional tax option is a one-way door. A company that opts for 115BAA during a loss-making year and later becomes profitable with large SEZ or R&D deductions cannot revert to the old regime to claim those deductions.
- Filing Form 10-IC or 10-ID after the due date and assuming the option is valid. While CBDT circulars and ITAT decisions have provided some relief for late filers, the safest position is to file the form before the ITR due date. Late filing creates unnecessary litigation risk, especially for foreign-invested companies seeking certainty.
- Treating foreign company branch income as eligible for concessional rates. Only domestic companies (incorporated in India) qualify. A foreign company with a branch office or permanent establishment in India pays tax at 40% base rate (effective ~41.60%-43.68%). This is a fundamental reason to incorporate a subsidiary rather than operate through a branch.
Practical Example
Scenario: Meridian Electronics GmbH, a German industrial sensor manufacturer, plans to set up a production facility in India. It incorporates Meridian Electronics India Pvt Ltd in January 2020 and commences manufacturing in November 2023 — well within the March 31, 2024 deadline.
Year 1 (FY 2023-24): Revenue of INR 25 crore, taxable profit of INR 4 crore.
| Tax Regime | Tax Calculation | Tax Payable |
|---|---|---|
| Old regime (30%) | INR 4 crore × 34.94% | INR 1,39,76,000 |
| Section 115BAA (22%) | INR 4 crore × 25.17% | INR 1,00,68,000 |
| Section 115BAB (15%) | INR 4 crore × 17.16% | INR 68,64,000 |
By opting for Section 115BAB, Meridian India saves INR 71,12,000 compared to the old regime — a 50.9% reduction in tax outgo. Over five years of similar profitability, the cumulative saving would exceed INR 3.55 crore.
Meridian files Form 10-ID electronically before October 31, 2024 (the ITR due date for AY 2024-25). The option is now permanent. Even if Meridian later diversifies into software services, its manufacturing income continues to be taxed at 15%, though any non-manufacturing income must also be reported under the same regime.
The German parent benefits further: dividends repatriated from India attract a withholding rate of 10% under the India-Germany DTAA (instead of 20% domestic rate), and Germany provides a credit for Indian taxes paid, eliminating double taxation on the same profits.
Key Takeaways
- Section 115BAA offers a 22% tax rate (effective 25.17%) to any domestic company willing to forgo specified exemptions and deductions — available permanently with no sunset clause
- Section 115BAB offers a 15% rate (effective 17.16%) to new manufacturing companies incorporated after October 1, 2019 that commenced production by March 31, 2024 — the sunset has passed and no further extension has been announced
- Both regimes exempt companies from Minimum Alternate Tax, eliminating the MAT compliance burden and the need to maintain book profit calculations under Section 115JB
- The option is exercised via Form 10-IC (115BAA) or Form 10-ID (115BAB) and is irrevocable — companies cannot switch back to the old regime once the form is filed
- Foreign investors must incorporate a domestic Indian company (subsidiary or JV) to access these rates — branch offices and liaison offices of foreign companies are taxed at 40% base rate
- The concessional rates make India one of the most tax-competitive manufacturing destinations in Asia, with effective rates comparable to Singapore (17%) and lower than China (25%)
Planning your Indian subsidiary's tax structure or evaluating whether to opt for concessional rates? Beacon Filing provides corporate tax filing, regime selection advisory, and Form 10-IC/10-ID compliance for foreign-invested companies.