Section 115BAA, established through an ordinance in 2019, was brought into existence by the State Government. Also called the ‘Taxation Amendment Ordinance’, this provision took effect from September 20, 2019. The central objective of the introduction of this section was to mitigate the tax rates imposed on the domestic corporations, thereby making it easy for them to perform their business activities under the Government of India scheme.
This article focuses on the comprehensive description of the Section 115BAA of Income Tax Act (ITA), 1961. Read on to know why this provision was introduced and other important information associated with it.
The Income Tax Act, 1961 underwent an amendment to include Section 115BAA, providing a lowered corporate tax rate to domestic corporations. The enterprises can pay the tax at a rate of 22% in addition to the surcharge of 10% and 4% cess under this Section. This implies that these companies can choose to not pay the minimum alternate tax in case they decide to pay the tax under this section. This tax rate came into effect from the financial year 2019-2020.
Section 115BAA offers domestic companies a significantly reduced corporate tax rate, simplifying tax compliance while encouraging investment and growth. Below are the key features that define the scope, benefits, and conditions of this concessional tax regime:
Optional Regime
Domestic companies can choose to pay tax at 22% plus surcharge and cess.
No MAT
Companies opting for Section 115BAA are not subject to MAT.
No Other Exemptions
Companies must forego various exemptions and deductions under the Income Tax Act, 1961.
Non-Withdrawable
Once opted, the choice cannot be withdrawn for the current and subsequent assessment years.
Applicable to Domestic Companies Only
Foreign companies, LLPs, partnership firms, individuals, and other entities are not eligible.
Applicable from AY 2020-21
Companies can opt in any assessment year from AY 2020-21 onwards by filing the prescribed form.
Domestic corporations can pay the income tax under those introduced u/s 115BAA. However, they are required to fulfil certain criteria to be eligible for the same. Below mentioned are a few conditions they must fulfil:
The corporations which pay tax u/s 115BAA are not allowed to ask for other exemptions or incentives under another provision of the Income Tax Act, 1961.
Corporations are not allowed to claim any set off for losses which are mentioned above, provided they choose the new tax rates u/s 115BAA.
Domestic corporations must choose this tax regime either on or before the last IT returns filing dates. (Last Date: 30 September of a specific assessment year). Please note that it cannot be withdrawn or changed after opting for taxation under this section.
There are zero restrictions with respect to the turnover of a domestic corporation.
Existing as well as new companies can choose taxation u/s 115BAA.
Companies opting for the Section 115BAA concessional tax regime cannot claim the following deductions when calculating total income:
Section 10AA: Deductions for corporations in Special Economic Zones.
Section 33AB: Deductions for tea, rubber, or coffee businesses.
Sections 32 & 32AD: Depreciation and investment allowances for machinery in backward regions (Telangana, West Bengal, Bihar, Andhra Pradesh).
Section 35AD: Capital expenditure deductions for specified businesses.
Section 35: Scientific research expenditure deductions.
Section 33ABA: Site restoration fund deposits for fossil fuel corporations.
Chapter VI-A deductions (e.g., Sections 80-IA, 80-IB, 80-IAC), except Sections 80JJAA (new employee employment) and 80M (dividend income).
Sections 35CCC/35CCD: Skill development or agricultural extension project deductions.
Carry-forward losses/depreciation linked to any disallowed deduction above.
Section 115BAA offers domestic companies a concessional corporate tax rate of 22%, subject to certain conditions and restrictions. Let’s learn more about the tax structure and experience hassle-free business by leveraging the option to forego various exemptions and deductions in exchange for a lower tax rate.
Tax Rate and Applicability
Domestic companies can opt to pay tax at a flat rate of 22% plus applicable surcharge and health and education cess. This concessional rate applies from the financial year 2019-20 (Assessment Year 2020-21) onwards. Companies opting for this regime are exempt from the Minimum Alternate Tax (MAT), which otherwise applies at 15% for companies not choosing this option.
Conditions for Opting Section 115BAA
To avail the benefits under Section 115BAA, companies must meet the following conditions:
- The company must be a domestic company registered in India.
- The option to pay tax at the concessional rate must be exercised by filing Form 10-IC electronically before or on the due date of filing the income tax return.
- Once the option is exercised, it cannot be withdrawn for the current and subsequent assessment years.
- The company must forego most tax exemptions and deductions under the Income Tax Act, including those related to special economic zones, specified businesses, and capital expenditure allowances.
Having understood the key conditions companies must satisfy to opt for Section 115BAA, it is important to also consider the special income tax rates applicable to certain transactions under this chapter. Let’s look at a few of the special income tax rates of certain transactions under this chapter:
Nature of transaction |
Applicable Section |
Tax on Long Term Capital Gains |
112 |
Tax on Short Term Capital Gains in certain cases |
111A |
Tax on dividends, royalties, and fees for technical services in case of foreign companies |
115A |
Tax on Long Term Capital Gains in certain cases |
112A |
Tax on income from bonds or GDRs purchased in foreign currency or capital gain arising from their transfer |
115AC/ 115ACA |
Tax on winnings from lotteries, crossword puzzles, and races including horse races |
115BB |
Tax on income from virtual digital assets |
115BBH |
Tax on income from transfer of carbon credits |
115BBG |
The above provision clarifies that the rates of the special tax contained for several transactions in Chapter XII will be applicable to a company which opts for this new regime of tax under Section 115BAA. Once a company opts for the concessional tax rate under Section 115BAA of Income Tax Act, it won’t be able to choose the concessional tax rate under similar sections 115BA or 115BAB.
Section 115BAA provides domestic companies the option to pay a reduced corporate tax rate, subject to strict compliance with specified conditions. Understanding these provisions is essential to determine eligibility and the implications of opting for this concessional tax regime:
Sub-section 1
Sub-section (1) of Section 115BAA specifies that domestic companies opting for the concessional tax regime must comply with the conditions laid down in the Act. If a company fails to meet these conditions in any previous year, the option becomes invalid for the current and subsequent assessment years, and the company’s income will be assessed under the regular tax provisions. This ensures that only eligible companies benefit from the reduced tax rate of 22% plus surcharge and cess.
Sub-section 2
Sub-section (2) outlines the specific conditions a domestic company must fulfill to avail the concessional tax rate. These include the mandatory forfeiture of various exemptions and deductions under the Income Tax Act, such as those related to special economic zones, capital expenditure allowances, and certain Chapter VI-A deductions. Compliance with these conditions is essential for maintaining eligibility under Section 115BAA.
Sub-section 3
Sub-section (3) of Section 115BAA clarifies that while opting for the concessional tax regime, a domestic company’s total income must be computed without setting off any allowance or loss related to unabsorbed depreciation or deductions disallowed under sub-section (2). This means that any carry-forward losses or unabsorbed depreciation attributable to the disallowed deductions will lapse and cannot be claimed in subsequent years, ensuring that tax benefits are strictly limited to the conditions of Section 115BAA.
A domestic corporation must forego the below mentioned exemptions or deductions if it chooses the concessional tax regime u/s 115BAA:
Section |
Deduction or exemption which needs to be foregone if Section 115BAA is opted for |
10AA |
Deduction for newly established units in Special Economic Zones (SEZ) |
32(1)(iia) |
Tax incentives through accelerated depreciation at 35% or 20% rates |
32AD |
Investment Allowance for investment in machinery and plant in the backward areas that have been notified |
33AB |
Deduction related to the development account of coffee, tea, or rubber coffee |
33ABA |
Deductions that are related to the site restoration fund |
35(1) |
|
35(2AA) |
Deductions related to a sum which is paid to either a national lab, university, IIT, or a specific person who will be used for scientific research to be undertaken in a program that has been approved of |
35(2AB) |
Deductions related any kind of expense that has been incurred on in-house scientific development and research facility by a corporation which is engaged in the business of manufacture of article, production of article, biotechnology, as specified in the Eleventh Schedule |
35AD |
Deductions related to the depreciation on account of capital expenses on certain specified business |
35CCC |
Deductions related to the project of agricultural extension |
35CCD |
Deductions related to the expenses on the project of skill development |
Deductions under Chapter VIA |
A domestic corporation which opts for Section 115BAA will not take deductions mentioned under Chapter VIA. However, below mentioned deductions can be undertaken:
Note: Till assessment year 2020-21, the deductions under Section 80G and 80GGB were also available. |
(i) Furthermore, if a domestic corporation chooses Section 115BAA, it should calculate its total income without setting off any loss carried forward or deduction from an assessment year prior to this, if such depreciation or loss is attributable to any deduction mentioned above. |
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(ii) The total income should be calculated without setting off any allowance or loss for unabsorbed deduction deemed so u/s 72A, if such depreciation or loss is attributable to any deduction mentioned above. Note: Section 72A is related to the carry forwarding or setting off the cumulative loss or unabsorbed deduction in demerger or amalgamation. |
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(iii) The total income of a corporation which opts for Section 115BAA should be calculated by allowing the deduction, if at all, according to the provisions of Section 32 (besides the additional depreciation under Section 32 (1)). Note: A corporation which opts for Section 115BAA is allowed to claim the deduction but it will not be allowed to claim the additional deductions. Furthermore, if any carried forward deduction or loss is there as an additional depreciation, it will lapse. |
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Section 115BAA came into effect from the assessment year 2020-2021. Post this, it can be exercised for the following assessment years. The corporation must choose it by filling the form 10-IC because this section is an optional taxation system.
A particular corporation can choose to apply for this option in any assessment year since there are no particular limitations on the time for being able to choose this option. However, once you choose this option, it cannot be changed or withdrawn after this.
However, if a corporation is not able to comply with these specified conditions, this scheme would become invalid for the present and the subsequent assessment years. They will not be eligible to use this option any longer.
According to Rule no. 21AE of the ITA, the corporations can exercise the Section 115BAA. In order to opt for this option, they have to file form 10-IC of the ITA. It mainly comprises the choices to be made and the needs which are required to be submitted online through an e-verification code or a digital signature certificate.
It must be filed either on or prior to the due date of income tax return filing u/s 139(1) of the Internal Revenue Code, 1962. The deadline is 30th of November of every assessment year for the domestic corporations which are subject to Transfer Pricing rules and 31st of October for other companies.
Every domestic company has an option of paying their income tax at 22% rate if the following conditions are met.
According to this new regime of taxation, every domestic company can pay their income tax with a rate of 22% (applicable cess + surcharge). However, these corporations need to take into account the below mentioned deductions under the Income Tax Act, 1961:
Deductions u/s 10A for Special Economic Zones (SEZ).
Deductions u/s 35 for expenditure for scientific research paid to any university.
Deductions falling u/s 33AB for tea, rubber, and coffee.
Deductions falling under Chapter VI A, besides the sections of 80 LA, 80JJAA, and 80M.
Capital expenditure of a particular business u/s 35AD.
Concessions owing to the losses and unabsorbed depreciation falling u/s 72A.
Deductions falling u/s 35CCC and 35CCD for expenses incurred due to the skill development programmes or agriculture extension projects.
Additional depreciation falling u/s 32A and investment allowance for setting up industries (Section 32AD) in the backward areas of Telangana, Bihar, West Bengal, and Andhra Pradesh which are notified.
The effective tax rate reflects the average percentage of income paid in taxes after accounting for deductions and exemptions. Understanding these rates helps compare the real tax burden across different entities and income levels:
Total Income |
Effective Tax Rate (inclusive of surcharge and cess) |
Effective Tax Rate (inclusive of surcharge and cess) |
Up to Rs. 1 crore |
25.17% |
26% |
More than Rs. 1 crore but up to Rs. 10 crores |
25.17% |
27.82% |
More than Rs. 10 crores |
25.17% |
29.12% |
Disclaimer: The tax rates presented in this table are for general informational purposes only and may vary based on specific circumstances, applicable surcharges, cess, and other tax provisions. Tax laws are subject to change, and rates may differ depending on the taxpayer’s status, income type, and jurisdiction.
The domestic corporations which are looking to reap the benefits of the reduced rates on income tax u/s 115BAA of Income Tax Act, 1961 are required to fulfil a few requirements in order to be eligible for choosing such rates. Existing companies can switch to the tax rates mentioned in this section whenever they want. However, if they opt for a new taxation system over the already existing one, they cannot reap the benefits of other benefits available in the ITA.
FAQs
Which corporations can opt for Section 115BAA?
Domestic corporations which fulfil the eligibility criteria can opt for concessional tax rates under this section. Partnership firms, LLPs, individuals, foreign companies, AOPs, and BOIs cannot enjoy the benefits of reduced tax rates u/s 115BAA.
How to opt for Section 115BAA?
You can opt for Section 115BAA of Income Tax Act, 1961 electronically according to its Rule 21AE.
Is a foreign company eligible to opt for Section 115BAA?
No, foreign companies are not eligible to opt for the reduced tax rates u/s 115BAA.
Can MAT be applied to a company opting for Section 115BAA?
No, according to Section 115JB (5A) of the ITA, Minimum Alternate Tax (MAT) cannot be applied to a company which opts for Section 115BAA or 115BAB.
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