Concessional corporate tax explained: 22% under section 115BAA and 15% for new manufacturers under 115BAB

India runs two parallel corporate tax systems at once. A domestic company that does nothing special is taxed at the normal rates of 25% or 30%. But since the Taxation Laws (Amendment) Ordinance of 2019, a company can instead elect a flat concessional rate under section 115BAA (22%) or, if it is a genuinely new manufacturer, under section 115BAB (15%). For assessment year (AY) 2026-27, these two sections remain the single largest lever a finance team controls, and the choice, once made, is effectively permanent. This guide explains what each section says, works the arithmetic on a Rs 10 crore company, and lists the errors that surface most often in scrutiny.

What the Section Says

Start with the baseline. Per the Income Tax Department's Domestic Company help page for AY 2026-27, the normal rate is 25% where total turnover or gross receipts in the prescribed previous year do not exceed Rs 400 crore, and 30% for every other domestic company. On top of the base tax sits a surcharge (7% where total income is between Rs 1 crore and Rs 10 crore, 12% above Rs 10 crore) and a 4% Health and Education cess. A company on the normal regime is also exposed to Minimum Alternate Tax (MAT), levied at 15% of book profit.

Section 115BAA, introduced with effect from AY 2020-21, lets any domestic company opt for a flat 22% rate on its total income, regardless of turnover, by filing Form 10-IC on or before the due date of its return under section 139(1). The surcharge on a 115BAA company is fixed at 10% (it does not scale with income), and the 4% cess still applies. Crucially, the Income Tax Department confirms that a company opting for 115BAA is exempt from MAT. The trade is that the company forgoes a defined list of incentives: additional depreciation under section 32(1)(iia), the SEZ deduction under section 10AA, and most Chapter VI-A deductions, with section 80JJAA (new employment) and section 80M (inter-corporate dividends) surviving.

Section 115BAB is narrower and cheaper. It offers a 15% rate on business income to a new manufacturing domestic company incorporated on or after 1 October 2019, provided it commenced manufacturing or production of an article or thing on or before 31 March 2024 (the window as extended by the Finance Act 2022) and does not use plant, machinery or a building previously used for any purpose beyond the statutory tolerances. The election is made through Form 10-ID by the due date of the first return, and it too carries the fixed 10% surcharge, the 4% cess, and the MAT exemption. Income that is not business income (for instance, certain other-source income) is taxed at 22% inside a 115BAB company, not 15%.

There is also the older section 115BA (25% via Form 10-IB), largely superseded by 115BAA's lower 22% rate for most manufacturers who did not need MAT. Before choosing, model your own numbers with the income tax calculator.

Worked Example

Consider Meridian Components Pvt Ltd, a domestic company with taxable business income of exactly Rs 10 crore in FY 2025-26 (AY 2026-27), turnover under Rs 400 crore, and no MAT-triggering book adjustments. The three outcomes are set out below.

Reading across the table: moving Meridian from the normal 25% regime to section 115BAA cuts the bill from Rs 2.782 crore to Rs 2.5168 crore, a saving of about Rs 26.52 lakh on Rs 10 crore of income, even though the headline surcharge rises from 7% to 10%. The base-rate cut from 25% to 22% more than offsets the higher surcharge. If Meridian instead qualified as a new manufacturer under 115BAB, its tax would fall to Rs 1.716 crore, roughly Rs 1.066 crore lighter than the normal regime on the same income.

The effective rates are the numbers to memorise. A 115BAA company pays a flat 25.168% (22% x 1.10 x 1.04) whatever its income, and a 115BAB company pays 17.16% (15% x 1.10 x 1.04) on business income. Because both are flat, the marginal-relief calculations that complicate the normal regime near the Rs 1 crore and Rs 10 crore surcharge thresholds simply do not arise. You can sanity-check the surcharge and cess stacking against the old vs new comparison tool for the individual side of your group, and confirm withholding obligations on vendor payments with the TDS calculator.

One more figure matters for the normal-regime column: had Meridian's regular tax fallen below 15% of book profit, MAT would have applied at 15% and dragged the effective cost up. Under 115BAA and 115BAB that floor is switched off entirely, which is why loss-making or incentive-heavy companies that expected MAT often find the concessional route cheaper than the arithmetic above suggests.

Common Mistakes

The most expensive error is missing the Form 10-IC or Form 10-ID deadline. The election must be filed on or before the due date of the return under section 139(1); file the form late and the concessional rate is denied for that year. The Central Board of Direct Taxes had to issue Circular 6/2022 to condone certain 115BAA defaults for AY 2020-21, which tells you how common the slip is. Treat the form as a hard gate, not paperwork to follow the return.

A second recurring mistake is claiming a forbidden deduction in the same year as the 115BAA or 115BAB election. Once you opt in, additional depreciation under section 32(1)(iia), section 10AA SEZ relief, and most Chapter VI-A deductions are off the table. Carrying forward and setting off a loss that is itself attributable to any of those deductions is also barred, and that loss is treated as already given full effect. Scrutiny assessments frequently reverse a set-off the company thought was live.

Third, companies forget that the 115BAA and 115BAB elections are irreversible. Section 115BAA(5) states that once exercised, the option applies to that year and all subsequent years and cannot be withdrawn. A company that opts in during a high-profit year and then wants the incentive regime back in a loss year cannot switch. Model at least three years before filing the form.

Fourth, 115BAB manufacturers mistakenly apply 15% to their entire income. The 15% rate covers business income from manufacturing; other income is taxed at 22% within the same company, and there is an anti-abuse provision empowering the assessing officer to tax excess profits from closely connected transactions. If your new manufacturer earns rental or investment income, split the computation. Where that other income includes capital gains, run the numbers through the capital gains calculator before you file.

Finally, some companies assume 115BAB is still open to new entrants. It is not: the manufacturing commencement deadline of 31 March 2024 has passed, so a company incorporated today can no longer elect 115BAB, though existing opt-ins continue at 15%. For any new company, 115BAA at 22% is now the concessional route.

FAQ

What is the effective tax rate under section 115BAA for AY 2026-27?

The effective rate is 25.168%, calculated as the 22% base rate plus a flat 10% surcharge (24.2%) plus 4% Health and Education cess. The Income Tax Department confirms both the 10% surcharge and the 4% cess for 115BAA opt-ins, and that MAT does not apply.

How is section 115BAB different from section 115BAA?

Section 115BAA offers 22% to any domestic company that files Form 10-IC, giving an effective 25.168%. Section 115BAB offers 15% on business income to new manufacturing companies incorporated on or after 1 October 2019 that filed Form 10-ID, giving an effective 17.16%. Both share the flat 10% surcharge, 4% cess, and MAT exemption; 115BAB is restricted to eligible manufacturers.

Can a company switch back to the normal regime after opting for 115BAA?

No. Under section 115BAA(5), the option once exercised applies to that assessment year and every year afterwards and cannot be withdrawn. The same irreversibility applies to a 115BAB election, so both decisions should be modelled over multiple years before Form 10-IC or Form 10-ID is filed.

Does MAT apply to a company that opts for 115BAA or 115BAB?

No. Per the Income Tax Department's Domestic Company help page, companies opting for special-rate taxation under section 115BAA or 115BAB are exempt from Minimum Alternate Tax, which is otherwise charged at 15% of book profit on companies in the normal regime.

Which deductions must a company give up to claim 115BAA?

Opting in forfeits additional depreciation under section 32(1)(iia), the SEZ deduction under section 10AA, and most Chapter VI-A deductions, with section 80JJAA (additional employee cost) and section 80M (inter-corporate dividends) among the survivors. Losses attributable to the forgone deductions cannot be carried forward or set off.

Is section 115BAB still available to a company incorporated in 2026?

No. Section 115BAB requires manufacturing to have commenced on or before 31 March 2024 (the date as extended by the Finance Act 2022), so a company incorporated in 2026 cannot elect it. Such a company would instead consider section 115BAA at 22%.

What forms are used to opt into these concessional rates?

Form 10-IC is filed for section 115BAA (22%), Form 10-ID for section 115BAB (15%), and Form 10-IB for the older section 115BA (25%). Each must be filed on or before the due date of the return under section 139(1) for the election to be valid.