Section 115BAA of the Income Tax is a section included in the Income Tax Act 1961 that defines a lower corporate tax rate of 22% plus a surcharge of 10% and an education cess of 4% for domestic companies in India. The Indian government has always tried to support domestic companies operating in India to ensure that they can compete better with foreign companies and contribute positively to the Indian economy. For this purpose, the Indian government introduced section 115BAA in the Income Tax Act 1961 to allow domestic companies to lower their tax burden. If you are an entrepreneur or are looking to establish a company, it is important to know about section 115BAA.
This blog will help you understand everything you need to know about section 115BAA of the Income Tax Act and how you can use the learnings to lower your company’s tax burden and increase the overall profit.
What is section 115BAA of the Income Tax Act, 1961?
Section 115BAA of the Income Tax Act of 1961 is a section that outlines a lower tax provision for domestic companies. Domestic companies in India can opt for tax payment under section 115BAA, where, instead of the normal corporate tax rate of 30%, they only have to pay tax at a rate of 22%. However, the 22% rate is in addition to a 10% surcharge and 4% education cess.
The Indian government implemented section 115BAA of the Income Tax Act on September 20, 2019, through the Taxation (Amendment) Ordinance 2019. It brought various amendments to the Income Tax Act of 1961 and provided an option for domestic companies to pay tax at a lower rate. Previously, domestic companies had no option but to pay tax at a flat corporate tax rate of 30%, but the Indian government implemented section 115BAA to ensure effective tax savings for domestic companies.
Also read: Section 192 of Income Tax Act
Features of section 115BAA of the Income Tax Act
Here are the features of section 115BAA of the Income Tax Act:
- Domestic Indian companies can utilise this section and pay a lower tax at the rate of 22%.
- The lower tax rate of 22% is in addition to a 10% surcharge and a 4% education cess.
- When companies choose this section, the effective tax rate lowers to 25.17% instead of 30%.
- A company does not have to pay tax under the Minimum Alternate Tax (MAT) if it chooses section 115BAA for filing taxes.
Implications of the companies option for section 115BAA
Here are the implications of companies opting for section 115BAA of the Income Tax Act:
- If a company chooses to file tax under section 115BAA, it can not claim any other exemptions or deductions. This means that the business or the company can not claim any other deductions under sections 80C, 80D, and 80G. However, they can claim all the eligible deductions mentioned under section 115BAA.
- If a business chooses to file tax under section 115BAA at a lower rate of 22%, it must continue to file taxes under section 115BAA and at the rate of 22%, as it is not permitted to switch back to the old corporate tax rate of 30%.
- If a business is involved in generating or distributing electricity, it is not eligible for filing taxes at the rate of 22% under section 115BAA and must pay taxes at the flat corporate rate of 30%.
Conditions specified under eligibility criteria of section 115BAA
All domestic companies are eligible to file taxes under section 115BAA at a lower rate of 22% (plus surcharge and education cess) instead of the flat corporate tax rate of 30%. However, companies opting for the 22% tax rate under section 115BAA can not claim any further deductions or exemptions listed under any other sections of the Income Tax Act 1961.
In such a case, the total income of the company will be calculated without considering:
- Claiming any deduction or exemption available for companies established in Special Economic Zones (SEZs) under section 10AA of the Income Tax Act 1961.
- Claiming investment allowance under section 32AD and additional depreciation under section 32 for new plant and machinery. However, the plant and machinery must have been made in notified backward areas in the states of Bihar, Telangana, Andhra Pradesh, and West Bengal.
- Claiming deductions by coffee, rubber, and tea manufacturing companies under section 33AB.
- Claiming deductions for deposits made for site restoration funds by companies operating in producing and extracting natural gas or petroleum under section 33ABA.
- Claiming deductions for expenses made towards scientific research or payments made to a research association, national laboratory, university, or IIT under section 35.
- Claiming deductions by companies for capital expenditure under section 35AD.
- Claiming deductions on the expenditure made towards agriculture extension projects under section 35CCC or skill development projects under section 35CCD.
- Claiming deductions for incomes listed under chapter VI-A that are allowed under sections 80IA, 80IAB, 80IAC, 80IB, etc., apart from deduction listed under section 80JJAA.
- Claiming the offset of any loss that is carried forward or depreciation from previous years if such losses were incurred regarding the deductions mentioned above.
- Claims made for unabsorbed depreciation or for offsetting carried forward losses by an amalgamated company if such depreciation or loss is because of deductions mentioned above. However, normal depreciation is eligible for a claim.
- Companies must choose section 115BAA before the due date of filing the ITR. Once chosen, the company can not switch to any other section for filing ITRs.
- Companies can switch to section 115BAA from their current section to file ITRs without any restrictions on annual turnover or years of operations.
Also read: Section 43B of Income Tax Act
The tax rate for domestic companies under section 115BAA
Here is a detailed table defining the tax rate under section 115BAA for domestic companies:
| Conditions for domestic companies | Income tax rate |
| When the turnover of a company’s previous year or the gross revenue is lower than Rs. 400 crores | 25% |
| The company has chosen section 115BA | 25% |
| The company has chosen section 115BAA | 22% |
| The company has opted for section 115BAB | 15% |
| Any other domestic company | 30% |
What is the new effective rate applicable for domestic companies?
Here is a table depicting the new effective rate applicable for domestic companies that have chosen to file taxes under section 115BAA of the Income Tax Act:
| Base tax rate | Applicable surcharge | Education cess | Effective tax rate |
| 22% | 10% | 4% | 22×1.1×1.04= 25.168% |
Can a taxpayer utilise MAT credits section 115BAA option is exercised?
Domestic companies that choose section 115BAA for filing taxes and making use of the 22% tax rate can not claim MAT credits for taxes paid under MAT during the holiday period. MAT credits refer to the tax credits accumulated by a company under the Income Tax Act's Minimum Alternate Tax (MAT) provisions. MAT ensures that companies with significant profits but low taxable income due to various exemptions and deductions pay a minimum amount of tax.
Furthermore, companies choosing section 115BAA can not claim the offsetting of any depreciation carried forward for the assessment year in which the company has chosen section 115BAA and all the future assessment years hereon.
Also read: Section 112A of Income Tax Act
Can a company opt out of this section?
Domestic companies that do not want to file taxes under section 115BAA can opt out of the section immediately after the expiry of their tax holiday period or incentives/exemptions. However, once a company files taxes under section 115BAA, it can not switch to the old corporate tax rate and has to continue filing taxes under the same section.
Tax rate computation with and without section 115BAA
Here is a detailed table that shows the computation of tax rate with and without section 115BAA:
| Total income | Effective tax rate (including surcharge and education cess) | Effective tax rate (including surcharge and education cess) |
| Company opting for section 115BAA | Company not opting for section 115BAA | |
| Up to Rs. 1 crore | 25.17% | 26% |
| Above Rs. 1 crore but up to Rs. 10 crore | 25.17% | 27.82% |
| More than Rs. 10 crore | 25.17% | 29.12% |
Also read: Section 111A of Income Tax Act
Appropriate time to choose Section 115BAA
Section 115BAA of the Income Tax Act, 1961, was introduced to provide a lower corporate tax rate for domestic companies. The key benefit is the option for companies to pay tax at a reduced rate of 22%, without availing exemptions and deductions. Choosing Section 115BAA can offer significant tax savings, but it’s important to determine the right time to opt for this scheme. Below are the factors to consider when deciding if this section is suitable for your company.
Understanding the reduced tax rate under section 115BAA
Section 115BAA offers a reduced corporate tax rate of 22% (plus applicable surcharge and cess), provided the company opts out of various exemptions and deductions available under the Income Tax Act.
Evaluating the loss of exemptions and deductions
Before opting for Section 115BAA, companies should evaluate the exemptions and deductions they would have to forgo. If the company regularly claims deductions such as those under sections 10AA, 80G, or 35, the tax savings from a lower rate might not outweigh the loss of these benefits.
Determining the impact on business profitability
Choosing Section 115BAA may be beneficial for companies with stable profits but without significant deductions. If a company is currently in a high tax bracket, switching to this option can help improve profitability by reducing the overall tax liability.
Considering future tax planning needs
Companies should assess their long-term tax planning needs. Section 115BAA might be suitable for businesses aiming for long-term tax efficiency, especially those without significant investment or growth plans that would require tax incentives.
Assessing the impact on the company's financial health
Finally, opting for Section 115BAA should be done after considering the overall financial health of the company. While the lower tax rate is attractive, the loss of deductions could impact cash flow and investment opportunities.
Comparison of effective tax rate
The effective tax rate (ETR) reflects the average rate at which a company or individual is taxed on their income. It provides a clearer picture of tax liability than the statutory tax rate, as it takes into account deductions, exemptions, and tax credits.
Comparison of effective tax rate
Taxpayer Type |
Statutory Tax Rate |
Effective Tax Rate |
Key Factors Affecting ETR |
Corporates (Normal) |
30% |
Varies (20%-30%) |
Deductions, exemptions, credits |
Corporates (115BAA Option) |
22% |
Around 22% |
No exemptions/deductions |
Individuals (Higher Bracket) |
30% |
Varies (30%-35%) |
Deductions, exemptions, rebates |
Benefits of Section 115BAA and Section 115BAB
Section 115BAA and Section 115BAB of the Income Tax Act provide corporate tax incentives for companies, allowing them to reduce their tax liability in exchange for giving up certain exemptions and deductions. Both sections cater to different types of businesses, each offering distinct benefits. Here's a breakdown of the advantages of each section.
- Section 115BAA: Reduced tax rate
Companies opting for Section 115BAA benefit from a reduced tax rate of 22%, which can lead to significant savings for those with stable profits. - Section 115BAA: No need for exemptions and deductions
Unlike regular tax regimes, Section 115BAA doesn’t allow for deductions, exemptions, or incentives. However, the lower tax rate can compensate for this, especially for companies with minimal deductions. - Section 115BAB: Tax rate of 15% for new companies
Section 115BAB offers an even more attractive tax rate of 15% for new domestic manufacturing companies set up after October 1, 2019, with certain conditions. - Section 115BAB: Benefit for companies involved in manufacturing
New manufacturing companies can benefit from lower tax burdens under Section 115BAB, which is ideal for companies looking to invest in capital-intensive industries. - Section 115BAB: Exemption from minimum alternate tax (MAT)
Section 115BAB also exempts eligible companies from paying Minimum Alternate Tax (MAT), making it an even more beneficial option for newly set-up businesses.
Key Takeaways
- Domestic companies can opt for section 115BAA to pay taxes utilising a reduced tax rate of 22% (plus applicable surcharge and education cess).
- Companies opting for this section cannot claim specific exemptions or deductions, including those under Sections 10AA, 32AD, 33AB, 33ABA, 35, 35AD, 35CCC, and additional depreciation under Section 32(1)(iia).
- Companies choosing section 115BAA are exempt from the Minimum Alternate Tax (MAT) provisions under section 115JB.
- Companies must decide to opt for section 115BAA on or before the due date to file their income tax returns for the relevant assessment year. Once exercised, the option cannot be withdrawn.
- Companies opting for section 115BAA have to pay taxes at an effective rate of 25.17% rather than the fixed rate of 30%.
Conclusion
Section 115BAA is beneficial for domestic companies that want to pay an effective lower tax of 25.17% and avoid paying a higher tax at the old 30% corporate tax rate. Utilising section 115BAA can help companies lower their tax burden and ultimately increase their revenues or profits, which they can use for business purposes. This section is beneficial for companies with stable and predictable profit margins that do not rely heavily on various tax deductions and incentives, enabling them to benefit from the lower tax rate consistently.
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