Sections 115BAA and 115BAB: how domestic companies cut their tax rate to 22% or 15%

A domestic company that reports the same profit can pay tax at four very different rates, and the gap is not small. Under the default regime a large company pays 30% plus surcharge and cess; under Section 115BAA it pays a flat 22%; and a new manufacturer under Section 115BAB pays just 15%. The Income Tax Department's own domestic-company help page for AY 2026-27 sets these rates out side by side, yet many company promoters still file under the default 30% band because nobody ticked the concessional box in time. This guide explains what Sections 115BAA and 115BAB actually say, works through the arithmetic on a Rs 5 crore profit, and lists the filing mistakes that cost companies the lower rate.

What the Section Says

Section 115BAA was inserted by the Taxation Laws (Amendment) Act, 2019 and lets any existing domestic company elect to be taxed at a flat 22% on its total income, regardless of turnover or the year it was set up. Section 115BAB, inserted at the same time, is narrower: it offers 15% but only to a new domestic manufacturing company that is set up and registered on or after 1 October 2019. The Income Tax Department confirms both headline rates on its return-applicability page for companies.

Three features apply to both regimes. First, a single flat surcharge of 10% replaces the default two-tier surcharge (7% on income above Rs 1 crore, 12% above Rs 10 crore). Second, a 4% Health and Education cess is added on top of tax-plus-surcharge, exactly as in the default regime. Third, a company that opts in is fully exempt from Minimum Alternate Tax (MAT), so the 15% MAT charge on book profit under Section 115JB simply does not apply.

The price of the lower rate is a long list of forgone deductions. A company under 115BAA or 115BAB cannot claim the area-based and profit-linked incentives such as Section 80-IA, 80-IAB, 80-IAC and 80-IB, cannot set off any brought-forward loss that relates to those deductions, and must compute depreciation without the additional depreciation under Section 32(1)(iia). The Income Tax Department's help page notes two survivors: the deduction for new employment under Section 80JJAA and the inter-corporate dividend deduction under Section 80M remain available.

For 115BAB there are two extra rate lines. Income that is not derived from manufacturing — for example, income taxed under a specific head that the section does not cover — is charged at 22%, not 15%. And under Section 115BAB(6), where a manufacturer books more profit than is reasonable from a close-connection arrangement, the excess is taxed at 30%. Short-term capital gains on assets on which no depreciation is claimed are taxed at 22%; you can size such a gain with the capital gains calculator. To qualify at all, a 115BAB company must have commenced manufacturing on or before 31 March 2024 — the deadline the Finance Act, 2022 fixed when it amended Section 115BAB(2)(a).

Here is how the four domestic-company rates compare on 1 September 2026:

Worked Example

Take Meridian Steel Pvt Ltd, a domestic company whose turnover in FY 2020-21 exceeded Rs 400 crore, so it does not qualify for the 25% band. For AY 2026-27 its taxable total income is Rs 5,00,00,000. Compare the default 30% regime with a 115BAA election.

Electing 115BAA cuts Meridian's bill from Rs 1,66,92,000 to Rs 1,25,84,000 — a saving of Rs 41,08,000 on the same Rs 5 crore of profit. Notice that the flat 10% surcharge under 115BAA is actually higher than the 7% Meridian would pay in the default band, but the eight-percentage-point drop in the base rate swamps it. You can reproduce this working for any figure in the income tax calculator.

Now suppose the same Rs 5 crore were the manufacturing profit of a new company set up in 2021 that qualifies under 115BAB. Tax at 15% is Rs 75,00,000, the 10% surcharge adds Rs 7,50,000, and 4% cess on the Rs 82,50,000 sub-total adds Rs 3,30,000, for a total of Rs 85,80,000 at an effective 17.16%. Against the default 30% bill of Rs 1,66,92,000, that is a saving of Rs 81,12,000 — nearly half the tax gone. A company weighing whether to route new capacity through a fresh 115BAB entity should model both the advance tax instalments and the loss of Section 80-IA before committing.

Common Mistakes

The single most expensive error is missing the form. A 115BAA election is not automatic: the company must file Form 10-IC electronically on or before the due date for furnishing its return under Section 139(1). A 115BAB election needs Form 10-ID on the same timeline. In several appeals the Income Tax Appellate Tribunal has had to decide whether a late or missing Form 10-IC can be condoned; the CBDT eventually issued Circular 19/2023 offering relief for certain AY 2021-22 filings, but relying on condonation is a poor plan when a Rs 41 lakh saving is on the line.

The second mistake is treating the election as reversible. Once a company opts into 115BAA or 115BAB, the choice is irrevocable and applies to that year and every year after it. A company cannot flip back to the default regime in a later year to use a fresh deduction, so the promoter must be sure the forgone incentives are genuinely smaller than the rate saving before ticking the box.

The third mistake concerns MAT credit. A company sitting on unutilised MAT credit under Section 115JAA loses the ability to carry it forward once it moves to 115BAA, because the concessional regime switches MAT off entirely. Companies with large accumulated MAT credit sometimes find it cheaper to exhaust that credit under the default regime for a year or two before electing 115BAA. This is a modelling exercise, not a default choice.

A fourth error, specific to manufacturers, is assuming any new company qualifies for 115BAB. The company must not be formed by splitting up or reconstructing an existing business, must not use plant and machinery previously used in India beyond the 20% tolerance the section allows, and must be engaged in manufacture or production of an article — not merely the business of software development, mining, or the conversion of marble blocks, which the section specifically excludes. A self-assessment tax shortfall discovered in scrutiny because the company wrongly claimed 15% instead of 22% or 30% carries interest under Sections 234B and 234C.

FAQ

Can a company that files under 115BAA still claim depreciation?

Yes, but only normal depreciation under Section 32(1)(ii). The additional depreciation of 20% on new plant and machinery under Section 32(1)(iia) is not allowed, and any brought-forward additional depreciation lapses. Normal depreciation on the written-down value continues as usual, which is why capital-heavy companies still find 115BAA attractive.

Is the 22% rate under 115BAA before or after surcharge and cess?

The 22% is the base rate. On top of it a flat 10% surcharge and a 4% cess apply, taking the effective rate to 25.168%. That is 22% multiplied by 1.10 for surcharge and then by 1.04 for cess. The Income Tax Department's company help page lists the 10% surcharge explicitly for 115BAA.

Does a small company with turnover under Rs 400 crore benefit from 115BAA?

It depends. A company with FY 2020-21 turnover up to Rs 400 crore already pays 25% base, giving an effective rate of 27.82% to 29.12% depending on surcharge. Electing 115BAA drops the effective rate to 25.168%, so there is still a saving, but the company must weigh it against the deductions it would forgo. Run both scenarios in the income tax calculator before deciding.

Can an LLP or partnership firm use these sections?

No. Sections 115BAA and 115BAB apply only to domestic companies as defined in the Income Tax Act. A limited liability partnership or a partnership firm is taxed at a flat 30% plus surcharge and cess, as explained in our note on how partnership firms and LLPs pay a flat 30% income tax for AY 2026-27.

What happens if a 115BAB manufacturer earns some non-manufacturing income?

Income that is not derived from or incidental to manufacturing is taxed at 22% rather than 15%, and any excess profit from a close-connection arrangement under Section 115BAB(6) is taxed at 30%. Short-term capital gains on non-depreciable assets are taxed at 22%. The 15% rate is reserved for the manufacturing business income itself.

Is MAT payable if a company opts for 115BAA or 115BAB?

No. Both sections switch off Minimum Alternate Tax under Section 115JB, so there is no 15% charge on book profit. In exchange, the company cannot carry forward any existing MAT credit into the concessional regime.

By when must the election form be filed?

Form 10-IC for 115BAA and Form 10-ID for 115BAB must be filed electronically on or before the due date for the income tax return under Section 139(1). Filing the return itself on time is not enough; the form is a separate step, and missing it is the most common reason companies are denied the lower rate.