Corporate tax basics

In short

Corporate tax is the income tax a company pays on its total income, computed under the Income-tax Act, 1961 (for tax year 2026-27 onwards, the Income-tax Act, 2025) and administered by the CBDT. A company is a separate assessee taxed at a flat rate (no slabs), with a choice between the normal regime and concessional regimes under sections 115BAA/115BAB, and a floor levy — Minimum Alternate Tax under section 115JB — so that book-profitable companies cannot pay nil tax. It is one of the two largest heads of direct tax collection in India, now second to non-corporate (personal) income tax, and the daily work of audit, tax and finance teams. In exams it carries heavy marks in B.Com Taxation / Direct Tax papers, and in placements it is tested by Big 4 tax practices, CA firms, banks, NBFCs and corporate finance teams through computation sums and rate-structure questions.

Explained

Who is a company and what is taxed

• Company — section 2(17): any Indian company, any body corporate incorporated outside India, or an institution declared a company by CBDT.
• Indian company (2(26)): registered under the Companies Act, 2013 (or earlier Acts) with its registered office in India.
• Domestic company (2(22A)): an Indian company, or any other company that has arranged to declare and pay dividends in India out of its Indian income.
• Foreign company (2(23A)): one that is not a domestic company. Not the same as non-resident — classification and residence are separate tests.
• Residence — section 6(3): a company is resident if it is an Indian company, or if its Place of Effective Management (POEM) is in India during the year.
• Scope: a resident company is taxed on global income; a non-resident company only on income received, accruing or deemed to accrue in India (section 5 read with section 9) — typically through a branch/PE, royalty, fees for technical services or interest.
• Closely held vs widely held (2(18)): matters for section 79 (carry-forward of losses) and section 2(22)(e) deemed dividend; section 56(2)(viib), the "angel tax", stood omitted from AY 2025-26.

Computing total income — from P&L to tax

1. Start from net profit as per the Statement of Profit and Loss (Schedule III, Companies Act, 2013) prepared under Ind AS/AS.
2. Add back inadmissible items: income tax and provision for tax, book depreciation, CSR expenditure (Explanation 2 to section 37(1)), provisions for unascertained liabilities (doubtful debts, warranty without basis), penalties for breach of law, cash payments above ₹10,000 per person per day (40A(3)), expenses on which TDS was not deducted/paid (40(a)(i)/(ia) — 100% for non-resident payees, 30% for resident payees), delayed PF/ESI deposits (employees' contribution under 36(1)(va), employer's under 43B), amounts to MSME suppliers unpaid beyond the MSMED time limit (43B(h)), expenditure relating to exempt income (section 14A), capital expenditure debited to revenue.
3. Deduct admissible items not in books: depreciation as per section 32 and Appendix I of the Income-tax Rules, 1962 (WDV block system — buildings 10%, furniture 10%, plant & machinery 15%, computers and software 40%, intangibles 25%); additional depreciation 20% on new plant and machinery of a manufacturer under 32(1)(iia) (10% if used under 180 days); preliminary expenses (35D) and amalgamation/demerger expenses (35DD) amortisation; weighted/scientific research deductions under 35.
4. Remove income taxable under other heads (rent of let-out property, dividend, capital gains credited to P&L) and tax them under their own heads.
5. Aggregate heads → set off current-year losses (sections 70–71) and brought-forward losses (business loss 8 years under 72; unabsorbed depreciation indefinitely under 32(2); speculation loss 4 years under 73) → Gross Total Income.
6. Chapter VI-A deductions: 80G (donations), 80M (dividend passed on), 80JJAA (30% of additional employee cost for 3 years), 80-IAC (eligible start-ups), 80LA (IFSC units) → Total Income, rounded to the nearest ₹10 (288A).
7. Apply the rate, add surcharge, apply marginal relief, add 4% Health and Education Cess, deduct TDS/TCS/advance tax/foreign tax credit and MAT credit → tax payable, rounded to nearest ₹10 (288B).

Rates, regimes and the choice between them

• Normal regime (domestic): 25% if turnover/gross receipts of the prescribed earlier year did not exceed ₹400 crore (FY 2023-24 for AY 2026-27); otherwise 30%.
• Section 115BAA — optional 22% for any domestic company, any year, but it must forgo 10AA, 32(1)(iia), 32AD, 33AB/33ABA, 35(1)(ii)/(iia)/(iii)/(2AA)/(2AB), 35AD, 35CCC/35CCD and all Chapter VI-A deductions except 80JJAA, 80M and 80LA; brought-forward loss/unabsorbed depreciation attributable to those deductions lapses; MAT does not apply and MAT credit cannot be used (from tax year 2026-27 — s. 200 of the Income-tax Act, 2025 — a company moving into this regime may set off MAT credit brought forward from before 1 April 2026, capped at 25% of the year's tax liability). Opted by filing Form 10-IC on or before the section 139(1) due date; once exercised it cannot be withdrawn.
• Section 115BAB — 15% for a new domestic manufacturing company incorporated on or after 1 October 2019 that commenced manufacture by 31 March 2024 (so the window is now closed to new entrants); conditions: not formed by splitting up/reconstruction, no previously used plant and machinery beyond 20%, no building earlier used as a hotel/convention centre; non-manufacturing income and certain capital gains are taxed at 22%; option via Form 10-ID. Section 115BA (25% for manufacturers set up on/after 1 March 2016) survives but is largely superseded.
• Foreign company: base rate 35% (reduced from 40% with effect from AY 2025-26). Specific lower rates apply to royalty/FTS and certain interest under sections 115A, 44BB, 44BBA and the applicable DTAA — the treaty rate prevails if more beneficial (section 90).
• Surcharge: domestic normal regime — 7% if total income exceeds ₹1 crore up to ₹10 crore, 12% above ₹10 crore; foreign company — 2% and 5% for the same bands; under 115BAA/115BAB a flat 10% irrespective of income. Cess 4% on tax plus surcharge in all cases.
• Marginal relief caps surcharge so that the extra tax on income just above a threshold does not exceed the income above that threshold.
• Rates are fixed annually by the Finance Act; always state the assessment year you are computing for.

Minimum Alternate Tax (section 115JB)

• Why: companies with large accounting profits could pay little tax using exemptions and accelerated depreciation. MAT taxes book profit instead.
• Rate: 15% of book profit plus surcharge and cess (9% for a unit in an IFSC) up to AY 2026-27; the Finance Act, 2026 cut it to 14% from tax year 2026-27 (s. 206 of the Income-tax Act, 2025). Tax payable = higher of normal tax and MAT.
• Book profit = net profit as per Schedule III P&L, add income tax/deferred tax, depreciation, amounts carried to reserves, provisions for unascertained liabilities and diminution in asset value, expenditure relating to section 10 exempt income; less depreciation (excluding the revaluation element), withdrawals from reserves earlier added, exempt income, and brought-forward loss or unabsorbed depreciation, whichever is less.
• MAT credit (115JAA) = MAT paid − normal tax; carried forward and set off in up to 15 subsequent assessment years against the excess of normal tax over MAT. No interest is paid on it. From 1 April 2026 MAT is a final tax for domestic companies: no new credit arises, and credit already accumulated can be used only after moving to the concessional regime (capped at 25% of tax liability a year); foreign companies keep the old set-off.
• Not applicable to companies opting for 115BAA/115BAB, and (by the 2016 amendment) to foreign companies with no PE/place of business in India or resident of a DTAA country without a PE. Form 29B (CA's report) must accompany the return. The parallel levy for non-corporates is AMT at 18.5% under 115JC.

Dividends, distributions and group issues

• DDT abolished: section 115-O ceased to apply to dividends declared on or after 1 April 2020. Dividends are now taxed in the shareholder's hands at applicable rates, and the company deducts TDS under section 194 at 10% (threshold ₹5,000, raised to ₹10,000 per payee from 1 April 2025).
• Section 80M removes cascading: a domestic company receiving dividend gets a deduction up to the dividend it distributes one month before its return due date.
• Buyback: the 20% buyback distribution tax under section 115QA was withdrawn for buybacks on or after 1 October 2024; from then until 31 March 2026 the consideration was a deemed dividend in the shareholder's hands with cost as a capital loss; from 1 April 2026 (Finance Act, 2026) it is taxed as capital gains for the shareholder, with promoters paying additional tax (effective about 22% for corporate and 30% for non-corporate promoters).
• Transfer pricing (sections 92–92F): international and specified domestic transactions must be at arm's length using CUP, RPM, CPM, PSM, TNMM or any other prescribed method; Form 3CEB is mandatory; Master File (Form 3CEAA) and CbCR (Form 3CEAD) apply above prescribed thresholds; safe harbour and APA routes exist.
• Thin capitalisation (94B): interest paid to a non-resident associated enterprise above ₹1 crore is deductible only up to 30% of EBITDA, excess carried forward 8 years.
• GAAR (Chapter X-A) can deny a tax benefit from an impermissible avoidance arrangement where the benefit exceeds ₹3 crore.
• Section 79: a closely held company loses carry-forward of business losses if beneficial voting power of 51% does not remain with the same persons; relaxed for eligible start-ups (all original shareholders continuing, for losses within 10 years of incorporation — extended from 7 by the Finance Act, 2023).

Compliance calendar and procedure

• PAN and TAN are mandatory; a company must file a return under section 139(1) even if income is nil or a loss.
• Advance tax (section 211) in four instalments — 15% by 15 June, 45% cumulative by 15 September, 75% by 15 December, 100% by 15 March. Interest: 234B 1% per month where advance tax paid is below 90% of assessed tax, 234C 1% per month for deferment of instalments, 234A 1% per month for late filing.
• Tax audit under section 44AB where turnover exceeds ₹1 crore (₹10 crore if cash receipts and payments are each ≤5%) — Forms 3CA and 3CD, due 30 September.
• Return: ITR-6 (companies other than those claiming exemption under section 11; ITR-7 for such entities), due 31 October, and 30 November where Form 3CEB is required. Verification by digital signature only.
• Other duties: monthly TDS deposit and quarterly returns (24Q/26Q/27Q), Form 3CEB, Form 29B, Form 10-IC/10-ID, SFT reporting, and the statutory audit/CSR (2% of average net profits, section 135) obligations under the Companies Act, 2013.
• Current position to note: the Income-tax Act, 2025 was enacted in August 2025 and takes effect from 1 April 2026, restructuring and renumbering the 1961 Act largely without changing corporate rates. Papers and computations for AY 2026-27 are still under the 1961 Act; confirm which law and assessment year the question specifies. Key new numbers: 115BA/115BAA/115BAB → ss. 199/200/201; 115JB → s. 206; 139 → s. 263; 44AB → s. 63; 79 → s. 119; 80M → s. 148. The 2% e-commerce equalisation levy was withdrawn from 1 August 2024 and the 6% advertisement levy from 1 April 2025 — rates and thresholds in this area change with each Finance Act.

Key points

• Separate legal entity - a company is taxed independently of its shareholders at a flat rate; no basic exemption limit and no slabs.
• Section 2(22A) / 2(23A) - domestic vs foreign company; section 6(3) - Indian company or POEM decides residence.
• Normal rate - 25% if the prescribed-year turnover is up to ₹400 crore, else 30%, plus surcharge and 4% cess.
• Section 115BAA - 22% + 10% surcharge + 4% cess = 25.168% effective, with most deductions and MAT given up; Form 10-IC, irreversible.
• Section 115BAB - 15% (17.16% effective) for new manufacturers that began production by 31 March 2024; closed to new entrants.
• Foreign company - 35% base; 36.4% / 37.128% / 38.22% effective across the surcharge bands; treaty rate applies if lower.
• MAT (115JB) - 15% of book profit; payable only if higher than normal tax; not applicable under 115BAA/115BAB.
• MAT credit (115JAA) - excess of MAT over normal tax, carried forward 15 assessment years, no interest; no new credit from 1 April 2026, when MAT (cut to 14%) became a final tax.
• Depreciation - only section 32 WDV block rates are allowed; book depreciation is always added back.
• CSR expenditure - disallowed under section 37(1) even though mandatory under section 135 of the Companies Act.
• DDT gone - dividends taxed in shareholders' hands since 1 April 2020; company deducts TDS under section 194.
• Section 80M - prevents cascading when a domestic company receives and redistributes dividend.
• Losses - business loss 8 years, unabsorbed depreciation indefinite, speculation loss 4 years; section 79 restricts closely held companies.
• Advance tax - 15/45/75/100% by 15 June, September, December and March; interest under 234B and 234C at 1% per month.
• Returns - ITR-6 by 31 October, or 30 November for transfer-pricing cases; filing is compulsory even at a loss.
• Transfer pricing and GAAR - arm's length pricing with Form 3CEB; GAAR applies above a ₹3 crore tax benefit.
• Marginal relief - limits surcharge at ₹1 crore and ₹10 crore so extra tax never exceeds extra income.

Formulas and examples

Example 1 — choosing a regime is not always "lowest rate wins". A domestic manufacturer (turnover ₹250 crore in FY 2023-24) has profits of ₹10 crore before claiming additional depreciation of ₹1.5 crore under section 32(1)(iia).

• Normal regime: total income = 10 − 1.5 = ₹8.5 crore. Tax 25% = ₹2.125 cr; surcharge 7% = ₹0.14875 cr; subtotal ₹2.27375 cr; cess 4% = ₹0.09095 cr → ₹2,36,47,000.
• Section 115BAA: additional depreciation is forgone, so total income = ₹10 crore. Tax = 10 × 25.168% = ₹2,51,68,000.
• The normal regime is cheaper by ₹15,21,000. 115BAA pays only when the deductions given up are small.

Example 2 — computation from the books (115BAA opted). Net profit per P&L ₹80,00,000, after debiting book depreciation ₹12,00,000, CSR ₹6,00,000, provision for doubtful debts ₹3,00,000, penalty for a statutory breach ₹1,00,000 and a cash purchase of ₹50,000; dividend of ₹5,00,000 from an Indian company is credited; depreciation under section 32 is ₹18,00,000; dividend of ₹3,00,000 is distributed in time.

Tax at 22% = ₹17,93,000; surcharge 10% = ₹1,79,300; subtotal ₹19,72,300; cess 4% = ₹78,892 → ₹20,51,192, rounded to ₹20,51,190 (= 81,50,000 × 25.168%).

Example 3 — MAT and MAT credit. A domestic company (normal regime, 25% rate) has book profit of ₹50,00,000 but total income of only ₹8,00,000 after section 32 depreciation and deductions.

• Normal tax = 8,00,000 × 25% = ₹2,00,000 + cess ₹8,000 = ₹2,08,000.
• MAT = 50,00,000 × 15% = ₹7,50,000 + cess ₹30,000 = ₹7,80,000.
• Tax payable = the higher, ₹7,80,000. MAT credit = 7,80,000 − 2,08,000 = ₹5,72,000, usable in the next 15 assessment years when normal tax exceeds MAT. Had the company opted for 115BAA, MAT would not apply and no credit would arise. (This credit mechanism is the AY 2026-27 position; from tax year 2026-27 MAT is 14% and final, so no new credit is created.)

Example 4 — advance tax and interest under 234C. Tax on total income ₹20,00,000, TDS credit ₹2,00,000 → advance tax ₹18,00,000. Required: ₹2,70,000 by 15 June, ₹8,10,000 cumulative by 15 September, ₹13,50,000 by 15 December, ₹18,00,000 by 15 March. The company paid nothing by 15 June and then kept to schedule.

• Shortfall on 15 June = ₹2,70,000 → interest = 2,70,000 × 1% × 3 = ₹8,100 under 234C. No further 234C or 234B interest, since later instalments were met in full.

Example 5 — foreign company with a branch in India. Income attributable to the Indian PE = ₹12 crore.

• Tax 35% = ₹4.20 cr; surcharge 5% (income above ₹10 cr) = ₹0.21 cr; subtotal ₹4.41 cr; cess 4% = ₹0.1764 cr → ₹4,58,64,000 (38.22% effective). If a DTAA prescribes a lower rate for the particular income stream, section 90 lets the company apply it with a Tax Residency Certificate and Form 10F.

Where it is used

• Big 4 and CA firms (Deloitte, PwC, EY, KPMG, Grant Thornton, BDO): direct tax compliance, ITR-6 preparation, tax audit, Form 29B and 3CEB, litigation support before CIT(A) and ITAT.
• Corporate finance and tax teams of listed companies (Reliance, TCS, Infosys, L&T, ITC): effective tax rate planning, regime choice under 115BAA, deferred tax under Ind AS 12 and quarterly tax provisioning.
• Banks, NBFCs and insurers: credit appraisal reads the tax computation and deferred tax balances; corporate banking relationship managers assess cash flows net of advance tax.
• Start-ups and MSMEs: 80-IAC benefit, section 79 loss-carry-forward relief on funding rounds, and 43B(h) MSME payment timelines.
• Manufacturing and PLI-linked investments: 115BAB was the headline incentive behind new plants, and the 31 March 2024 cut-off shaped investment timing.
• Government and regulators: CBDT, Income Tax Department assessment units, faceless assessment and appeal centres, and the Union Budget's corporate tax revenue estimates.

Interview questions

• Q: Is a domestic company the same as a resident company? A: No. Domestic status depends on incorporation in India (or arrangement to pay dividends in India) under section 2(22A); residence depends on section 6(3) — Indian company or POEM in India. A foreign company can be resident through POEM.
• Q: What is the effective tax rate under section 115BAA? A: 25.168% — 22% base, a flat 10% surcharge and 4% cess, regardless of the income level.
• Q: Why would a company stay out of 115BAA? A: Because it would lose large deductions such as 10AA, additional depreciation, weighted R&D and most Chapter VI-A claims, plus accumulated MAT credit — these can outweigh the lower rate.
• Q: What is MAT and when is it payable? A: A floor tax of 15% of book profit under section 115JB, payable when it exceeds tax computed under the normal provisions; it does not apply to companies opting for 115BAA or 115BAB.
• Q: How long can MAT credit be carried forward? A: Up to 15 assessment years after the year in which it arose, set off only against the excess of normal tax over MAT, with no interest.
• Q: Is CSR expenditure deductible? A: No — Explanation 2 to section 37(1) disallows it, though a CSR contribution to a fund eligible under section 80G may still qualify there (and 80G is unavailable under 115BAA).
• Q: How are dividends taxed after 2020? A: DDT under section 115-O was abolished for dividends declared on or after 1 April 2020; the shareholder pays tax at the applicable rate and the company deducts TDS under section 194. Section 80M relieves cascading within corporate chains.
• Q: Which depreciation goes into the tax computation? A: Only depreciation under section 32 at the Income-tax Rules' block rates; book depreciation is added back to the net profit.
• Q: Must a loss-making company file a return? A: Yes — a company files under section 139(1) irrespective of income, and timely filing is a condition for carrying forward business losses under section 80.
• Q: What are the advance tax dates and the cost of missing them? A: 15 June, 15 September, 15 December and 15 March for 15/45/75/100%; shortfalls attract 1% per month under section 234C, and paying under 90% of assessed tax attracts 1% per month under 234B.
• Q: What is marginal relief? A: A reduction of surcharge so that the additional tax on income just crossing ₹1 crore or ₹10 crore does not exceed the income exceeding that threshold.
• Q: What changed for foreign companies recently? A: The base rate was cut from 40% to 35% with effect from AY 2025-26, giving effective rates of 36.4%, 37.128% and 38.22% across the surcharge bands.

Common mistakes

• Applying individual slab rates or a basic exemption limit to a company — company rates are flat.
• Forgetting surcharge or cess, or using the band-based 7%/12% surcharge under 115BAA/115BAB instead of the flat 10%.
• Starting the computation from net profit without adding back book depreciation and then also claiming section 32 depreciation — double counting.
• Computing MAT and normal tax and adding them, instead of paying the higher of the two; or applying MAT to a 115BAA company.
• Treating CSR as deductible because the Companies Act makes it compulsory, and treating all provisions (doubtful debts, warranty) as allowable.
• Mixing up the turnover threshold year for the 25% rate, or confusing section 115BAA (companies) with 115BAC (individuals).
• Quoting stale figures — the ₹400 crore threshold, the 115BAB sunset date, the 35% foreign rate, the section 194 dividend threshold and the equalisation levy have all changed recently; cite the assessment year.

Related topics

Income tax basics · Business income and presumptive taxation · TDS and tax filing basics · Capital gains · Company final accounts and Schedule III · Deferred tax under Ind AS 12 / AS 22