A Guide to Save Corporate Tax with Section 115BAA of Income Tax Act

"Can your company really bring down its tax burden to just 22%?"

With the introduction of Section 115BAA of the Income Tax Act, 1961, domestic companies can now opt for this globally competitive rate. When surcharge and cess are added, the effective tax rate comes to 25.17%

The government introduced this option in the 2019 amendment. It aims to simplify corporate taxation and also tries to make India more attractive for investment. To avail this benefit, companies must forgo several exemptions and deductions, making it important to evaluate whether the switch is financially advantageous.

Quick Synopsis

• Section 115BAA offers domestic companies a concessional tax rate of 25.17% (22% + 10% surcharge + 4% cess).
• 115BAA of the Income Tax Act has no turnover limit and applies to both new and existing companies.
• Deductions under Sections 10AA, 32AD, 35AD, 80IA, etc., are not available.

What is Section 115BAA of Income Tax Act?

Section 115BAA of the Income Tax Act, 1961, provides eligible domestic companies in India the option to pay a lower corporate tax rate. Instead of the standard 30%, companies can choose to pay tax at 22%, plus a 10% surcharge and 4% cess.

This resulted in an effective rate of 25.17% from FY 2019–20. Introduced via the Taxation (Amendment) Ordinance 2019, this section simplifies taxation and encourages domestic businesses to retain profits, invest, and expand operations within India.

Why Was Section 115BAA Introduced?

This section makes India’s corporate tax regime more attractive and competitive. By offering a lower tax rate, the government intended to stimulate investment, support business expansion, and reduce the impact of the Minimum Alternate Tax (MAT) from 18.5% to 15%.

It encourages domestic companies to utilise savings for growth initiatives. It strengthens the overall business climate, ultimately contributing to economic development without altering the standard tax framework for non-eligible entities.

Features of Section 115BAA Tax Regime

1. Concessional corporate tax rate of 22% plus 10% surcharge and 4% cess, giving an effective rate of 25.17%.
2. Exemption from MAT provisions.
3. You must exercise the option by the due date for filing returns.
4. You cannot claim additional depreciation benefits under other provisions.
5. Once a company chooses Section 115BAA, the option remains fixed and cannot be withdrawn subsequently.

Who is Eligible for Section 115BAA of Income Tax Act?

1. Only domestic companies can exercise this option.
2. You must file Form 10-IC by the due date of your income tax return.
3. Once exercised, the option cannot be withdrawn in subsequent years.
4. Companies choosing to opt for Section 115BAA of the Income Tax Act must note that any carried-forward losses or unabsorbed depreciation linked to the disallowed deductions will lapse permanently.
5. An amalgamated company cannot claim such losses or depreciation.

Old vs New Regime: Tax Comparison

• Under Section 115BAA, the surcharge is a flat 10%, regardless of income.
• In the old regime, surcharge increases with income (7% between ₹1–10 Crore and 12% above ₹10 Crore).
• The effective tax rate for companies choosing Section 115BAA remains consistent at 25.17%, offering predictability.

Limitations of Section 115BAA

1. No deductions available to SEZ units under Section 10AA.
2. Disallowance of additional depreciation or investment allowance under Sections 32 and 32AD.
3. Withdrawal of deductions under Sections 33AB (tea, coffee, rubber) and 33ABA (site restoration fund).
4. Under the 115BAA of the Income Tax Act, claims for research expenditure or capital costs under Sections 35 and 35AD, along with benefits under 35CCC and 35CCD, are not permitted.
5. Chapter VI-A deductions are largely disallowed, except for Sections 80JJAA and 80M.
6. Losses or unabsorbed depreciation linked to the above deductions cannot be carried forward.

When Should Company Opt for Section 115BAA?

1. Return Filing Deadline: The option must be exercised before the ITR due date, generally 30th September, to enjoy the 25.17% concessional rate.
2. Irrevocable Nature: Once chosen, the decision cannot be reversed. Companies should carefully evaluate financial goals while ensuring compliance with the 115BAA of Income Tax Act conditions.
3. Losses and Depreciation: Set-off of past losses or unabsorbed depreciation from certain deductions is not allowed, requiring a balanced cost–benefit review.
4. Future Income Outlook: A lower tax rate benefits firms with consistent or rising profits, whereas companies reliant on deductions may prefer the old regime.

Section 115BAA of the Income Tax Act gives domestic companies the chance to lower their effective tax rate and maximise retained earnings. Alongside optimised tax planning, individuals can further secure predictable returns through fixed deposits.

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