Section 115BAA of Income Tax Act

What is Section 115BAA?

Section 115BAA of the Income Tax Act, 1961 was introduced to reduce the corporate tax rate for domestic companies. It allows eligible companies to pay tax at a concessional rate of 22%, provided they forego certain deductions and exemptions.

This provision is optional and once exercised, it cannot be withdrawn. Companies choosing this section will also be exempt from Minimum Alternate Tax (MAT), providing further tax relief.
 

Features of Section 115BAA of the Income Tax Act

Section 115BAA provides a concessional corporate tax regime for domestic companies, introduced to offer a lower tax rate in exchange for giving up certain deductions and incentives. It is optional—companies can choose it if it suits their tax profile.

Key features include:

• Lower tax rate for domestic companies
  Companies opting for Section 115BAA are taxed at a concessional base rate (and the final effective rate depends on applicable surcharge and cess).
• No MAT applicability (in most practical terms)
  Once a company opts for 115BAA, MAT (Minimum Alternate Tax) provisions generally become irrelevant for that company going forward, which can simplify planning for some businesses.
• Trade-off: many deductions and incentives are not allowed
  The concessional rate comes with restrictions - companies must forgo various exemptions, deductions, and profit-linked incentives that are otherwise available under the regular regime. This is often the deciding factor.
• Optional and consistent choice
  The regime is not mandatory. However, once chosen, it is intended to be followed consistently - so it’s not something companies can freely switch in and out of each year.
• More predictable tax planning
  For companies that do not heavily rely on incentives, 115BAA can make tax outgo more stable and easier to forecast.

In practical terms, 115BAA tends to work best for companies with a relatively straightforward P&L and limited dependence on special deductions.

Eligibility Criteria for Section 115BAA

To avail of the reduced tax rate under Section 115BAA, a domestic company must meet certain conditions:

1. The company must be a domestic entity registered in India under the Companies Act, 2013.
2. The company should not claim specific deductions, exemptions, or incentives, which are typically available under various sections of the Income Tax Act.
3. No set-off of brought forward losses if such losses were generated due to exemptions or deductions that are not permitted under Section 115BAA.
4. The company must file Form 10-IC before the due date for filing its Income Tax Return (ITR).
5. The option once exercised is irreversible—companies cannot switch back to the old tax regime after opting for this concessional rate.
    

Tax Rate Comparison: Section 115BAA vs. Other Corporate Tax Rates

The table below compares the corporate tax rates applicable under different sections:

Companies opting for Section 115BAA benefit from a significantly lower tax rate compared to the standard 30% corporate tax rate.
 

Exemptions and Deductions Not Allowed Under Section 115BAA

To avail of the lower 22% tax rate, companies must forego certain deductions and exemptions under the Income Tax Act. Some of these include:

1. Exemptions related to Special Economic Zones (SEZs) under Section 10AA.
2. Additional depreciation claims under Section 32(1)(iia).
3. Investment allowance under Section 32AD for investments in backward areas.
4. Scientific research expenditure under Section 35(1).
5. Deduction for start-ups under Section 80-IAC.
6. Deductions under Chapter VI-A (except 80JJAA and 80M).
7. Set-off of brought forward losses and unabsorbed depreciation related to disallowed deductions.

Companies need to carefully evaluate whether the benefits of the lower tax rate outweigh the impact of foregoing these deductions.

MAT Exemption Under Section 115BAA

One of the biggest advantages of Section 115BAA is that companies opting for this tax rate are exempt from Minimum Alternate Tax (MAT) under Section 115JB.

Previously, domestic companies were required to pay MAT at 18.5% of their book profits, leading to additional tax burdens. However, companies opting for Section 115BAA do not have to pay MAT, providing a significant relief in tax compliance.

Additionally, companies cannot claim MAT credit if they opt for the reduced tax rate under Section 115BAA.
 

Procedure to Opt for Section 115BAA

A company must formally opt for Section 115BAA by filing Form 10-IC with the Income Tax Department before the due date of filing the Income Tax Return.

Steps to Apply:

1. Login to the e-Filing Portal on the Income Tax Department’s website.
2. Go to ‘Income Tax Forms’ and select Form 10-IC.
3. Fill in the required details and submit the form using a Digital Signature Certificate (DSC) or Electronic Verification Code (EVC).
4. Once submitted, the company cannot withdraw the option in future years.
    

When Should a Company Opt for Section 115BAA?

Choosing Section 115BAA is a strategic decision that depends on a company’s current tax situation and future tax planning.

Companies that should opt for Section 115BAA:

• Companies not availing significant tax deductions or incentives.
• Businesses with stable or increasing profits, making them liable for higher tax payments.
• Companies looking for simplified tax compliance without additional deductions.

Companies that may NOT benefit from Section 115BAA:

• Start-ups and companies currently claiming tax holidays or profit-linked deductions.
• Businesses with substantial unabsorbed depreciation or losses due to previous incentives.
• Companies that still benefit from investment-related tax deductions.

Companies should perform a detailed tax impact analysis before making a final decision.

Impact of Section 115BAA on Indian Businesses

The introduction of Section 115BAA has had a significant impact on corporate taxation in India. The reduced tax rate has:

1. Boosted Investor Confidence – Lower taxes have encouraged businesses to invest more in expansion and innovation.
2. Attracted Foreign Direct Investment (FDI) – A competitive tax rate makes India a more attractive destination for global investors.
3. Enhanced Business Profitability – Companies have higher post-tax earnings, leading to increased reinvestment in operations.
4. Reduced Compliance Burden – The removal of MAT and exemptions simplifies tax compliance and reporting.
5. Strengthened the ‘Make in India’ Initiative – By lowering corporate taxes, the government has incentivised domestic production and economic growth.
    

Conclusion

Section 115BAA is a game-changer for corporate taxation in India, offering significant tax savings and simplified compliance. The reduced 22% corporate tax rate (effective 25.17%) is an attractive option for businesses that do not require additional deductions and exemptions.

However, companies must carefully evaluate their tax position before opting for this section. Businesses that benefit from deductions and incentives may be better off staying in the older tax regime.

With this reform, the Indian government has taken a major step towards creating a business-friendly environment that encourages investment, promotes industrial growth, and enhances global competitiveness.