Corporate Tax in India: Meaning , Tax Rate & How It Works

What is Corporate Tax?

Corporate tax is levied on the income earned by companies operating in India. It applies to both domestic companies (registered in India) and foreign companies (operating in India but registered outside the country).

The tax is calculated on net profits after deducting operating expenses, depreciation, and other allowable deductions. Companies must file their corporate tax returns annually, following the financial year (April 1 – March 31).

Special Corporate Tax Rates for Domestic Companies

Companies opting for special taxation schemes under different sections of the Income Tax Act are taxed at reduced rates.

Surcharge for Special Tax Regimes

For companies opting for Section 115BAA or Section 115BAB, the surcharge is a flat 10%, regardless of total income.

MAT Exemptions

• Companies opting for Section 115BAA or 115BAB are exempt from MAT.
• Companies opting for Section 115BA must still pay MAT if applicable.

Surcharge on Corporate Tax

A surcharge is an additional charge on corporate tax, applicable based on a company’s total income.

• 7% Surcharge: If total income exceeds ₹1 crore but does not exceed ₹10 crore.
• 12% Surcharge: If total income exceeds ₹10 crore.

Marginal Relief

If income exceeds ₹1 crore but is below ₹10 crore, the total tax payable (including surcharge) should not exceed the tax payable on ₹1 crore plus the excess income over ₹1 crore.

If income exceeds ₹10 crore, the total tax payable should not exceed the tax on ₹10 crore plus the excess income over ₹10 crore.

Health and Education Cess

An additional Health and Education Cess is levied at 4% on the total income tax and surcharge.

Minimum Alternate Tax (MAT) for Domestic Companies

What is MAT?

Minimum Alternate Tax (MAT) ensures that companies with low taxable income due to deductions or exemptions still contribute to taxes.

• If a company’s tax payable under normal provisions is less than 15% of its book profit, it must pay MAT at 15% of book profit.
• For companies in International Financial Services Centres (IFSCs) that earn solely in convertible foreign exchange, MAT is 9% instead of 15%.

Deductions & Exemptions Under Corporate Tax

Companies can reduce their tax liability by claiming deductions under various sections:

• Depreciation (Section 32): Companies can claim depreciation on fixed assets.
• Donations (Section 80G): Charitable contributions are eligible for deductions.
• Research & Development (Section 35): Expenses on R&D qualify for tax benefits.
• Investment in Startups (Section 80-IAC): Startups recognized by DPIIT enjoy a 3-year tax holiday.
• Expenses for Employee Welfare: Contributions to PF, gratuity, and health insurance premiums are deductible.

Surcharge on Foreign Companies

A surcharge is an additional tax levied on income tax when a foreign company's taxable income exceeds a certain threshold. The applicable surcharge rates are:

• 2% Surcharge: If taxable income is above ₹1 crore but does not exceed ₹10 crore.
• 5% Surcharge: If taxable income exceeds ₹10 crore.

Marginal Relief on Surcharge

Marginal relief is provided to foreign companies in cases where the surcharge payable is more than the additional income that made them liable for the surcharge.

• If income exceeds ₹1 crore but is below ₹10 crore, the total tax payable (including surcharge) should not exceed the tax on ₹1 crore plus the excess income over ₹1 crore.
• If income exceeds ₹10 crore, the total tax payable should not exceed the tax on ₹10 crore plus the excess income over ₹10 crore.

Health and Education Cess

Foreign companies are also required to pay Health and Education Cess at 4% on the total income tax plus surcharge (if applicable). This cess is used to fund healthcare and education initiatives in India.

Minimum Alternate Tax (MAT) for Foreign Companies

• Foreign companies that do not fall under Explanation 4 of Section 115JB are subject to Minimum Alternate Tax (MAT) at 15% of their book profit, if their normal tax liability is less than 15% of their book profit.
• The MAT is applicable along with surcharge and health & education cess.

Corporate Tax Compliance: Filing Returns & Due Dates

Companies must file their Income Tax Return (ITR-6) annually. Below are key deadlines:

Late filing attracts penalties under Section 234F, with fines up to ₹10,000.

Tax Rate For Partnership Firms, Including LLP Or Local Authorities

Partnership firms, Limited Liability Partnerships (LLPs) and certain local authorities are treated differently from companies when it comes to corporate tax in India. These entities are typically taxed as non-corporate entities, and the tax rate applicable to them is distinct from the rate that applies to domestic companies.

• Partnership Firms and LLPs: Income earned by partnership firms and LLPs is generally taxed at a flat rate on total income. This means the entire taxable profit of the firm is subject to tax at this specific rate without reference to slab rates that apply to individuals or other entities.
• Local Authorities: Local authorities that are not companies but are subject to tax under the Income Tax Act - such as certain municipal bodies and statutory organisations - are also generally taxed at a flat rate similar to that of partnership firms and LLPs.

It’s important to note that these rates are set by the Finance Act for each assessment year and may be revised periodically through budget announcements. Additionally, surcharges and cess may apply on the basic tax amount, influencing the effective tax liability.

Unlike companies, partnership firms and LLPs do not benefit from provisions such as dividend distribution tax or certain incentives available to companies. Understanding the specific tax rate and compliance requirements for these entities helps ensure accurate tax planning and timely filing of returns.

Common Mistakes to Avoid While Filing Corporate Tax

• Missing Deadlines: Late filing leads to penalties and interest charges.
• Incorrect Deductions: Claiming unqualified deductions may lead to legal scrutiny.
• Not Maintaining Records: Keep financial documents for at least 6 years.
• Ignoring Advance Tax Payments: Pay tax in quarterly installments to avoid penalties.

Corporate Tax vs. Income Tax

Conclusion

Corporate tax in India is a key financial responsibility for businesses. Understanding tax rates, deductions, and compliance deadlines helps companies reduce their tax liability and avoid penalties. The Union Budget 2025 has introduced favorable changes, including lower tax rates for foreign companies and increased deductions for R&D investments.

Entrepreneurs and investors must stay updated with tax policies to ensure compliance and financial efficiency. Consulting a tax expert or Chartered Accountant can further help in effective corporate tax planning.

By following this guide, businesses can streamline their tax obligations and focus on growth while staying compliant with Indian tax laws.