Section 115BAA: 22% Flat Tax Rate for Domestic Companies

Updated: 3 June 2026 | Income-tax Act 1961 / Income-tax Act 2025 | AY 2025-26

Section 115BAA allows any domestic company to pay income tax at 22% flat (effective ~25.17% with 10% surcharge + 4% cess) instead of the regular 25–30% slab, provided it gives up specified deductions, investment allowances, and accumulated MAT credits. Once exercised via Form 10-IC, the option is irrevocable.

25.17%

Effective tax rate under Section 115BAA
22% base + 10% surcharge on tax + 4% cess — flat, no progressive surcharge slab

Tax Rate Comparison: 115BAA vs Regular Regime

Company Type / Scenario	Regular Rate (Base)	Effective Rate (incl. surcharge + cess)	115BAA Effective Rate
Domestic company (turnover ≤ ₹400 cr)	25%	~26.00%	25.17%
Domestic company (turnover > ₹400 cr)	30%	~34.94%	25.17%
New manufacturing co. (115BAB)	15%	~17.01%	Not applicable
Foreign company	40%	~43.68%	Not eligible
MAT (if regular regime)	15% of book profit	~17.01%	MAT not applicable

What Must Be Forfeited Under 115BAA

Companies opting for 115BAA must give up the following deductions and credits entirely:

Deduction / Credit	Section	Status Under 115BAA
Investment-linked deductions (80IA, 80IB, 80IC, 80IE)	Chapter VI-A	Not allowed
Additional depreciation on new P&M (20%)	32(1)(iia)	Not allowed
Investment allowance for new assets	32AC / 32AD	Not allowed
SEZ unit deduction	10AA	Not allowed
Scientific research expenditure (weighted)	35(2AB)	Not allowed (actual exp. allowed)
Capital expenditure for specified businesses	35AD	Not allowed
Skill development / CSR linked deductions	35CCC / 35CCD	Not allowed
Accumulated MAT credit	115JAA	Lapses — cannot be used
Brought-forward loss (from above sections)	Various	Set-off of such portion not allowed
Donations / 80G	80G	Not allowed
Normal depreciation (WDV method)	32	Allowed
New employee deduction	80JJAA	Allowed
Business expenses (rent, salary, interest)	36 / 37	Allowed

Who Benefits Most from Section 115BAA

Section 115BAA is most advantageous for domestic companies that:

Have a clean tax position with no major Chapter VI-A deductions
Are in the higher slab (turnover > ₹400 crore) and currently pay 30% base rate
Do not have significant accumulated MAT credit that would lapse
Are not SEZ units or do not have investment-linked incentive businesses
Have completed their accelerated depreciation claims on existing assets
Are profitable and likely to remain so (no loss carry-forward value being surrendered)

How to Opt: Form 10-IC

To exercise the Section 115BAA option, a domestic company must file Form 10-IC electronically on the Income Tax e-filing portal (incometax.gov.in) before or on the due date of filing the return of income under Section 139(1) for the first year in which the option is exercised. The form captures: company PAN, assessment year, and a declaration that the conditions are met. Once filed, the option applies from that assessment year onwards and is irrevocable — Form 10-IC cannot be withdrawn or revised to opt out. Companies that miss the filing deadline may approach the CBDT through a condonation petition, though approval is not guaranteed.

Surcharge under 115BAA: Flat 10%

One important benefit of 115BAA is the flat 10% surcharge regardless of income level. Under the regular regime, the surcharge for domestic companies is: 7% for income > ₹1 crore, 12% for income > ₹10 crore. Under 115BAA, no progressive surcharge applies — it is always 10%. This makes the 115BAA effective rate of 25.17% truly flat and predictable, irrespective of the company's total income. For large, highly profitable companies with income well above ₹10 crore, this surcharge benefit alone can be substantial.

Frequently Asked Questions

What is Section 115BAA and who can opt for it?

Section 115BAA of the Income-tax Act, 1961 (as retained in the Income-tax Act 2025) provides an option for domestic companies to pay income tax at a flat rate of 22% (before surcharge and cess). This rate was introduced by the Taxation Laws (Amendment) Ordinance 2019 with effect from Assessment Year 2020-21. Any domestic company — whether a private limited company, public limited company, or one-person company — can opt for this concessional rate. Foreign companies are explicitly excluded and cannot exercise this option. The option must be exercised by filing Form 10-IC before or along with the return of income for the relevant assessment year. Once the company opts for Section 115BAA, the effective tax rate works out to approximately 25.17% after factoring in a 10% surcharge (flat, not progressive) and 4% Health and Education Cess. The company must also give up certain deductions and incentives, which is the trade-off for the lower headline rate. Small companies with no deduction claims typically find 115BAA most beneficial, while those with large SEZ deductions or investment-linked incentives may prefer the regular regime until those deductions are fully utilised.

What deductions must a company forgo under Section 115BAA?

A company opting for Section 115BAA must forgo several deductions and exemptions. These include: (1) Chapter VI-A deductions linked to income (80C, 80G, 80IA, 80IB, 80IC, 80IE and similar investment-linked deductions) — though 80JJAA for new employees is still allowed; (2) Additional depreciation under Section 32(1)(iia); (3) Investment allowance under Section 32AC; (4) Accelerated depreciation for new machinery under Section 32AD; (5) Deductions under Section 33AB (tea, coffee, rubber development account); (6) Section 33ABA (site restoration fund); (7) Deduction for scientific research under Section 35 (except actual expenditure); (8) Section 35AD (capital expenditure for specified businesses); (9) Section 35CCC and 35CCD; (10) Set-off of any unabsorbed depreciation or brought-forward losses computed under the above sections from earlier years; and (11) Deduction under Section 10AA for SEZ units. Importantly, regular depreciation under Section 32 at WDV (Written Down Value) method is still allowed. Deductions under Sections 36 (other deductions), 37 (general business expenditure), and 80JJAA (employment of new employees) remain available. If a company has carry-forward losses or unabsorbed depreciation that arose partly from these forfeited deductions, it must compute the deduction that would not have been available and add that back.

Is MAT (Minimum Alternate Tax) applicable under Section 115BAA?

No, Minimum Alternate Tax (MAT) under Section 115JB is NOT applicable to companies that opt for the concessional tax regime under Section 115BAA. This is one of the significant advantages of 115BAA beyond just the lower rate. Under the regular tax regime, many companies — particularly those with high book profits but lower taxable income due to deductions — end up paying MAT at 15% of book profit (plus surcharge and cess). By opting for 115BAA, the company is completely outside the MAT framework and pays tax only on its actual taxable income at 22% plus applicable surcharge and cess. Additionally, any MAT credit that the company accumulated in earlier years (before opting for 115BAA) under Section 115JAA cannot be utilised after the company opts for 115BAA. This MAT credit effectively lapses and is lost — a critical point companies must factor into their decision before exercising the 115BAA option. If a company has substantial accumulated MAT credits, it may be financially prudent to remain in the regular regime until those credits are utilised against regular tax liability before switching to 115BAA. Companies planning to exercise the option should model the MAT credit foregone against the expected tax savings from the lower rate over future years.

Can a company withdraw from Section 115BAA once opted?

No. Once a domestic company exercises the option under Section 115BAA, the option is irrevocable. The company cannot withdraw the option and revert to the regular tax regime in any subsequent assessment year. This is one of the most critical aspects of the 115BAA decision — it is a one-way door. Before opting, companies must carefully evaluate whether the lower tax rate benefit will persist across future years, considering: (1) whether any major deductions or incentives currently being enjoyed will continue, (2) the status of accumulated MAT credits that will be permanently lost, (3) any planned investments that may generate investment-linked deductions, (4) the business outlook and expected profitability, and (5) whether the company has any brought-forward losses from disallowed deductions that would lapse. The option is exercised by filing Form 10-IC on or before the due date of filing the return of income under Section 139(1). If the form is not filed in time, the benefit may be denied for that year, though the CBDT has in the past issued circulars allowing condonation of delay in specific circumstances. Most tax advisors recommend opting for 115BAA only after a 3-5 year tax modelling exercise to ensure it produces net tax savings over the planning horizon.

What is the difference between Section 115BAA and Section 115BAB?

Sections 115BAA and 115BAB both offer concessional corporate tax rates but differ significantly in eligibility and rates. Section 115BAA applies to all existing domestic companies (incorporated at any time) and offers a 22% flat tax rate, resulting in an effective rate of approximately 25.17% after 10% surcharge and 4% cess. Section 115BAB, on the other hand, was introduced specifically for new manufacturing companies incorporated on or after October 1, 2019, and which commenced manufacturing before March 31, 2023 (extended by notifications). Section 115BAB offers a much lower rate of 15% — effective approximately 17.01% after 10% surcharge and 4% cess. Eligibility for 115BAB is stricter: the company must not be formed by splitting up or reconstruction of an existing business, must not use plant and machinery previously used or installed in India, and must start fresh manufacturing. 115BAB also bars all the same deductions as 115BAA plus additional restrictions. If a new manufacturing company qualifies for 115BAB, it is generally far more beneficial than 115BAA. Existing companies or service companies not engaged in fresh manufacturing can only access 115BAA. Both regimes exclude MAT, and both are irrevocable once opted for by filing the respective forms (Form 10-IC for 115BAA, Form 10-ID for 115BAB).

Corporate Income Tax Guide Section 115BAB (15% for New Mfg.) MAT / Minimum Alternate Tax ITR for Companies Advance Tax Calculation

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