What Is Corporate Tax?
Corporate tax is the direct tax imposed on the net profits of a company. Every company registered in India — whether domestic or foreign-owned — pays corporate tax on its taxable income. India reformed its corporate tax structure in September 2019 through the Taxation Laws (Amendment) Act, introducing lower rates for companies that forgo certain deductions and exemptions.
The tax is computed on the company's total income as determined under the Income Tax Act 1961, after allowing deductions and set-off of losses.
Current Tax Rates (AY 2026-27)
| Category | Base Rate | Surcharge | Cess (4%) | Effective Rate |
|---|---|---|---|---|
| Section 200 of the Income-tax Act, 2025 (section 115BAA of the Income-tax Act, 1961) — new regime, no exemptions | 22% | 10% | 4% | 25.17% |
| Section 201 (Table, Sl. No. 1) of the Income-tax Act, 2025 (section 115BAB of the Income-tax Act, 1961) — new manufacturing companies incorporated after Oct 1, 2019 | 15% | 10% | 4% | 17.16% |
| Old regime — turnover up to INR 400 crores | 25% | 7% / 12% | 4% | 26-29.12% |
| Old regime — turnover above INR 400 crores | 30% | 7% / 12% | 4% | 31.2-34.944% |
| Foreign company (non-resident) | 35% | 2% / 5% | 4% | 36.40%-38.22% |
The surcharge rate depends on total income: 7% if income exceeds INR 1 crore but not INR 10 crores; 12% if income exceeds INR 10 crores. For section 200 and section 201 companies, surcharge is fixed at 10% regardless of income.
Key Distinction: Domestic Company vs Foreign Company
An Indian company with 100% foreign ownership is still a "domestic company" for tax purposes — it is incorporated in India. The 35% rate applies only to foreign companies operating in India through a branch or permanent establishment without incorporating a separate Indian entity.
The Two Tax Regimes
New Regime (Section 200)
A company opting for section 200, read with section 205(1), pays an effective rate of 25.17%. However, it must forgo:
- Deductions under sections 138, 139 and 142 of the Income-tax Act, 2025 (sections 80-IA, 80-IAB and 80-IBA of the Income-tax Act, 1961 — infrastructure undertakings, SEZ development, housing projects)
- Additional depreciation under section 32(1)(iia) of the Income-tax Act, 1961
- Deduction under section 45 of the Income-tax Act, 2025 (section 35 of the Income-tax Act, 1961) for scientific research
- Set-off of losses carried forward from years when these deductions were claimed
- Deductions under section 133 of the Income-tax Act, 2025 (section 80G of the Income-tax Act, 1961) for donations to charitable institutions — this is sometimes missed
The option, once exercised, is irrevocable. You cannot switch back to the old regime in a subsequent year.
New Manufacturing Regime (Section 201)
Under section 201 (Table, Sl. No. 1) read with section 205(2), manufacturing companies incorporated on or after October 1, 2019, that commenced production by the March 31, 2024 sunset date (a deadline that has not been extended in any subsequent Budget) can pay just 17.16% effective tax. Conditions:
- Must be engaged in manufacturing or production of an article or thing
- Must not use plant and machinery previously used for any purpose (i.e., all new machinery)
- Must not be formed by splitting up or reconstruction of an existing business
How Corporate Tax Applies to Foreign-Owned Companies
- The 25.17% rate is available — Most foreign-owned Indian subsidiaries opt for section 200 since they do not claim the exemptions that the old regime preserves. This makes India's effective rate competitive with Singapore (17%), Hong Kong (16.5%), and the UAE (9%).
- MAT does not apply under section 200 — Companies in the new regime are exempt from MAT. This removes the need to compute how MAT under section 206 (section 115JB) is computed on book profit under the Income-tax Act, 2025 (section 115JB of the Income-tax Act, 1961).
- DTAA interaction — Corporate tax paid in India can be credited against tax liability in the foreign shareholder's home country, subject to the applicable Double Taxation Avoidance Agreement.
- Transfer pricing adjustments increase taxable income — If the TPO adjusts the arm's length price upward, the additional income is taxed at the applicable corporate tax rate.
- Dividend distribution — Since April 2020, dividends are taxed in the hands of shareholders. An Indian company distributing dividends to a foreign parent must withhold tax at 20% (or the DTAA rate, whichever is lower).
Advance Tax
Companies must pay corporate tax in installments during the year, not as a lump sum after year-end:
| Installment | Due Date | Minimum % of Tax Liability |
|---|---|---|
| First installment | June 15 | 15% |
| Second installment | September 15 | 45% (cumulative) |
| Third installment | December 15 | 75% (cumulative) |
| Fourth installment | March 15 | 100% |
Interest under Section 424 of the Income-tax Act, 2025 (section 234B of the Income-tax Act, 1961) (shortfall in advance tax) and Section 425 of the Income-tax Act, 2025 (section 234C of the Income-tax Act, 1961) (deferment of installments) applies if payments are late or insufficient. The rate is 1% per month.
Tax Computation — Simplified Flow
- Start with revenue as per the profit and loss statement
- Deduct business expenses allowed under the Act (employee costs, rent, depreciation, etc.)
- Add back disallowed items — personal expenses, penalties, expenses without TDS deduction (section 35(b)(ii) of the Income-tax Act, 2025; section 40(a)(i) of the Income-tax Act, 1961)
- Apply the corporate tax rate (22% under section 200 or the old regime rate)
- Add surcharge and cess
- Subtract advance tax paid and TDS credits
- Pay the balance (or claim refund if excess was paid)
Penalties
- Non-payment of advance tax — Interest at 1% per month under sections 424 and 425
- Under-reporting of income — 50% of tax on under-reported income (Section 439 of the Income-tax Act, 2025 (section 270A of the Income-tax Act, 1961))
- Misreporting of income — 200% of tax on misreported income (Section 439)
- Non-filing of return — Prosecution possible under section 479 of the Income-tax Act, 2025 (section 276CC of the Income-tax Act, 1961) for wilful failure
Common Mistakes
- Claiming exemptions after opting for section 200 — Once the company opts for the new regime (by filing Form 10-IC), it cannot claim section 138 (section 80-IA of the Income-tax Act, 1961), additional depreciation, or other foregone deductions. Some companies claim them by mistake, triggering reassessment.
- Confusing domestic company rate with foreign company rate — A foreign-owned Indian company (incorporated in India) pays 25.17% under section 200. A foreign company branch in India pays 35%+. The difference is enormous.
- Not paying advance tax quarterly — Start-ups sometimes pay all tax at year-end, attracting Section 425 interest for each missed quarterly installment.
- Ignoring MAT credit carry-forward — Companies that previously paid MAT and then switched to section 200 cannot use accumulated MAT credit. The credit lapses. This should be factored into the old vs new regime decision.
- Not considering DTAA credits in the decision — The choice between old and new regime should account for whether foreign tax credits are available and how they interact with the lower section 200 rate.
Practical Example
A Singaporean investor holds 100% of a technology company in Bangalore. Revenue: INR 5 crores. Allowable expenses: INR 3.5 crores. Taxable income: INR 1.5 crores. The company has opted for section 200. Tax at 22%: INR 33 lakhs. Surcharge at 10%: INR 3.3 lakhs. Health and education cess at 4%: INR 1.45 lakhs. Total tax: INR 37.75 lakhs (effective 25.17%). Advance tax was paid quarterly — INR 5.66 lakhs by June 15, cumulative INR 17 lakhs by September 15, INR 28.31 lakhs by December 15, and the full INR 37.75 lakhs by March 15. No interest is due.
Related Terms
- Minimum Alternate Tax — Applies only in the old regime
- Income Tax Return — Where corporate tax is computed and reported
- Capital Gains Tax — Separate rates apply to gains on assets
- Dividend Tax — Withholding on distributions to shareholders
Need help choosing between the old and new tax regime? Beacon Filing runs the numbers for foreign-owned companies to find the best structure.