Tax Rates and Computation

Computation of Income and Tax Liability

This chapter outlines the statutory procedure for determining the total income and tax liability of a taxpayer under the Income-tax Act, 1961. The process broadly involves three stages: ascertaining the residential status and category of the assessee, computation of total income, and computation of tax liability.

Residential Status and Category of Taxpayer

Total income is determined with reference to the assessee’s category as defined under section 2(31), and his residential status in India. The scope of income taxable in India varies depending on whether the assessee is a resident, not ordinarily resident, or non-resident. While residents are taxed on global income, non-residents are taxed only on income received, deemed to be received, or accruing or arising in India.

Computation of Total Income

The process of computing total income includes the following sequential steps:

• Calculation of income under five heads: Salaries, House Property, Profits and Gains from Business or Profession, Capital Gains, and Other Sources.
• Clubbing of the income of another person, where applicable under Chapter V.
• Set-off and carry forward of losses as per Chapter VI, including intra-head and inter-head adjustments.
• Deduction of eligible amounts under Chapter VI-A from the gross total income.
• Determination of total income, bifurcated into normal income (taxed at applicable slab or standard rates) and special income (taxed at special rates).
• Aggregation of agricultural income for rate purposes, though it remains exempt under section 10(1).

Computation of Tax Liability

Tax is calculated on total income, segregating normal and special income. In case of domestic companies, concessional tax regimes under sections 115BA, 115BAA or 115BAB may be opted. Minimum Alternate Tax (MAT) provisions apply where tax on book profits exceeds tax on total income, except for companies under sections 115BAA or 115BAB.

For non-corporate assessees, normal income is taxed at applicable rates or as per the optional regime under section 115BAC (for individuals, HUFs, AOPs, BOIs, and AJPs) or section 115BAD/115BAE (for co-operative societies). The Alternate Minimum Tax (AMT) provisions apply to non-company assesses but are inapplicable to those opting for the concessional tax regime under sections 115BAC, 115BAD, or 115BAE.

Final tax liability is adjusted for surcharge, cess, MAT/AMT credit, relief under section 89, and foreign tax credit. Taxes already paid (advance tax, TDS, TCS, self-assessment tax) are reduced from the gross liability to determine the tax payable or refund due. Interest and late fees, if applicable, are added to the net liability.

 

Taxation under Section 115BA for Certain Domestic Manufacturing Companies

Section 115BA of the Income-tax Act, 1961 offers a concessional tax regime for specified domestic manufacturing companies subject to conditions.

• Eligibility Criteria

The following conditions must be satisfied to opt for the concessional rate:

• The assessee is a domestic company.
• The company is set up and registered on or after 01.03.2016.
• The company is engaged solely in the manufacturing or production of articles or things and related research or distribution activities.
• Total income is computed without claiming specified exemptions or deductions.
• No set-off of carried forward losses attributable to such exemptions or deductions is allowed.
• Depreciation is claimed as per prescribed rates, with higher rates (above 40%) restricted to 40% [Notification No. SO 3399(E), No.103/2016, dated 07.11.2016].

 

• Exemptions and Deductions Not Permissible

The concessional tax regime applies only if the company foregoes the following exemptions/deductions, among others:

• Deductions under section 10AA, 32(1)(iia), 32AD, 33AB, 33ABA, and section 35.
• Deductions under section 35AD, 35CCC, 35CCD.
• Deductions under Part C of Chapter VI-A, except section 80JJAA.

 

• Tax Rate

Eligible companies opting for this regime are taxed at 25% (plus applicable surcharge and cess) on normal income. Special income is taxed at the rates specified in the relevant provisions (Sections 110 to 115BBJ).

• Procedure for Exercising the Option

The option must be exercised by electronically furnishing Form 10-IB on or before the due date for furnishing the first return of income.

• Irrevocability and Transition

Once exercised, the option under this section cannot be withdrawn for the same or any other previous year. However, companies may opt to shift to the regime under section 115BAA.

• Applicability of MAT

Companies opting for section 115BA are still subject to the provisions of Minimum Alternate Tax (MAT) under section 115JB.

 

Taxation under Section 115BAA for Domestic Companies

Section 115BAA provides a concessional tax rate for domestic companies, subject to specified conditions.

• Eligibility and Conditions

To opt for the concessional rate of 22% (plus 10% surcharge and 4% cess; effective rate 25.17%), the following conditions must be met:

• The assessee is a domestic company.
• Total income is computed without claiming specified exemptions/deductions.
• No set-off of losses or unabsorbed depreciation attributable to such exemptions/deductions is allowed.
• Depreciation is claimed in the prescribed manner, with rates above 40% capped at 40% [GSR 610(E), Notification No. 82/2020, dated 01.10.2020].

 

• Specified Exemptions and Deductions to be forgone

The company must forego, inter alia, the following:

• Deductions under sections 10AA, 32(1)(iia), 32AD, 33AB, 33ABA, 35(1)(ii)/(iia)/(iii), 35(2AA), 35(2AB), 35AD, 35CCC, 35CCD.
• Chapter VI-A deductions (except sections 80JJAA, 80LA(1A), and 80M).

 

• Adjustment to WDV for Additional Depreciation

Where unabsorbed additional depreciation has not been fully claimed, it shall be added to the written down value of the block of assets as on 01.04.2019. This adjustment is allowed only if the option is exercised in AY 2020–21 [Second Proviso to Rule 5(1) inserted via GSR 610(E), Notification No. 82/2020].

 

• Amalgamation/Demerger Provisions

Successor companies may carry forward losses/depreciation of predecessor companies under section 72A. However, losses attributable to specified deductions are not eligible for set-off. The same adjustment to WDV for unutilized additional depreciation is permitted in such cases, subject to conditions.

 

• Procedure to Opt

The option must be exercised by furnishing Form No. 10-IC electronically (using digital signature or EVC) on or before the due date for filing the return of income. This can be done in any assessment year.

• Irrevocability and Non-Compliance

Once exercised, the option cannot be withdrawn for the same or any other previous year. Failure to comply with the regime’s conditions in any year results in permanent loss of eligibility.

 

• Switching from Section 115BAB

If a company becomes ineligible under section 115BAB, it may opt for the regime under section 115BAA.

 

• Exemption from MAT

Companies opting under this section are not subject to MAT under section 115JB. However, any MAT credit under section 115JAA lapses upon opting for this regime.

As per Circular No. 29/2019 [F. No. 142/20/2019-TPL, dated 02.10.2019], there is no fixed timeline to opt for this regime provided the option is exercised before the due date u/s 139(1) of the year for which it is first claimed. A company may choose to exercise the option after utilizing available MAT credit or setting off carried forward losses.

 

Section 115BAB – Tax on Income of New Manufacturing Domestic Companies

Section 115BAB, introduced by the Taxation Laws (Amendment) Ordinance, 2019, provides an optional concessional tax regime for new domestic manufacturing companies incorporated on or after 01.10.2019. This section is applicable from the Assessment Year 2020-21, subject to the satisfaction of specified conditions.

• Eligible Assessee

Only domestic companies incorporated on or after 01.10.2019 and engaged solely in manufacturing or production (including electricity generation), research in relation to, or distribution of manufactured goods, can opt for this regime. They must commence manufacturing on or before 31.03.2024.

• Ineligible Activities

The following businesses are excluded: development of software, mining, marble conversion, gas bottling, book printing, film production, or any business as may be notified.

 

• Conditions for Eligibility
• The company should not be formed by splitting up or reconstruction of an existing business (except under section 33B).
• It should not use previously used plant and machinery, subject to specified exceptions (not exceeding 20% of the total value, or imported and unused in India).
• It should not use buildings earlier used as hotels or convention centres, claiming deduction under section 80-ID.

 

• Computation of Income as

Income must be computed without claiming specified deductions or incentives, including but not limited to:

• Deductions under sections 10AA, 32(1)(iia), 32AD, 33AB, 33ABA, and section 35, Section 35AD, 35CCC, 35CCD.
• All deductions under Chapter VI-A, except under sections 80JJAA and 80M).

 

• Depreciation

Depreciation is to be computed as per the prescribed rules. The depreciation rate for any block of assets exceeding 40% shall be restricted to 40% [ Rule 5(1), as amended via Notification No. 82/2020 dated 01.10.2020].

• Manner of Opting

The option must be exercised electronically in Form 10-ID on or before the due date of furnishing the first return of income. Once exercised, it cannot be withdrawn.

• Tax Rates Applicable
• Income from manufacturing: 15%
• Income from non-manufacturing: 22%
• Short-term capital gains on depreciable assets: 15%
• Other short-term capital gains: 22%
• Excess profits from arranged affairs: 30%
• Special incomes: as per respective provisions
• Surcharge at 10% and health and education cess at 4% shall apply on the tax amount.

 

• Effect of Amalgamation/Demerger

In case of amalgamation/demerger, the successor company can set off carried forward losses/depreciation of the predecessor only if not attributable to deductions disallowed under this section. The successor must satisfy all conditions to remain eligible.

• Non-Compliance Consequences

If any condition under the regime is violated, the option becomes invalid for that and all future years. The company’s income shall then be computed as if the option had never been exercised.

• Applicability of MAT

Companies opting for this regime are exempt from Minimum Alternate Tax (MAT) under section 115JB.

• Anti-Avoidance Provision

If business transactions with related persons result in more than ordinary profits, the Assessing Officer may re-compute profits on a reasonable basis or with reference to the arm’s length price, and such excess profits shall be taxed at 30%.

 

New Tax Regime for Individual, HUF, AOP, BOI or AJP [Section 115BAC]

Section 115BAC, introduced by the Finance Act, 2020 and amended by the Finance Act, 2023, provides a concessional tax regime for individuals, HUFs, AOPs, BOIs, and AJPs. From Assessment Year (AY) 2024–25 onwards, this regime is the default tax regime.

• Eligible Persons

The new tax regime applies to:

• Individual
• Hindu Undivided Family (HUF)
• Association of Persons (AOP) (other than a co-operative society)
• Body of Individuals (BOI)
• Artificial Juridical Person (AJP)

 

• Conditions for Availing the Regime

To opt for this regime, income must be computed:

• Without specified exemptions and deductions.
• Without set-off of brought forward loss/depreciation attributable to such exemptions/deductions.
• Without set-off of loss under “Income from house property”.
• After claiming depreciation at prescribed rates (max. 40%).
• Without exemptions/deductions under any other law.

 

• Disallowed Exemptions/Deductions

Taxpayers must forego, among others, the following:

• Exemptions under Sections 10(5), 10(13A), 10(14), 10(17), 10(32), 10AA.
• Deductions under Sections 16(ii), 16(iii), 24(b), 32(1)(iia), 32AD, 33AB, 33ABA, 35, 35AD, 35CCC.
• Chapter VI-A deductions (Sections 80C to 80U), except 80JJAA, 80CCD, 80CCH(2), and 80LA(1A).

 

• Permitted Deductions/Exemptions for Employees
• Certain allowances under Rule 2BB (travel, transfer, conveyance, etc.).
• Transport allowance for specified disabled employees.
• Deduction for employer’s contributions to NPS [Section 80CCD] and
• Deduction for employer’s contributions to Agniveer Corpus Fund [Section 80CCH(2)].
• No exemption for free food and beverages via paid vouchers.

 

• Tax Rates Under the New Regime
• For AY 2025–26:

Total Income (Rs)	Rate
Upto 3,00,000	Nil
From 3,00,001 to 7,00,000	5%
From 7,00,001 to 10,00,000	10%
From 10,00,001 to 12,00,000	15%
From 12,00,001 to 15,00,000	20%
Above 15,00,000	30%

 

• For AY 2026–27:

Total Income (Rs)	Rate
Upto 4,00,000	Nil
From 4,00,001 to 8,00,000	5%
From 8,00,001 to 12,00,000	10%
From 12,00,001 to 16,00,000	15%
From 16,00,001 to 20,00,000	20%
From 20,00,001 to 24,00,000	25%
Above 24,00,000	30%

 

• Rebate Under Section 87A

Resident individuals are entitled to an enhanced rebate under Section 87A. For AY 2026–27 onwards, the rebate threshold is Rs. 12,00,000 with marginal relief, and the maximum rebate amount is Rs. 60,000. No rebate shall be allowed against the tax on any special income.

• Surcharge and Cess

Surcharge and Health & Education Cess rates are the same as under the old regime, except surcharge capped at 25% for income exceeding ₹5 crore.

• Option to Opt-Out of New Tax Regime
• For assessees without business/professional income: Can switch regimes annually by indicating the choice in the return of income under Section 139(1).
• For assessees with business/professional income: Must furnish Form 10-IEA within the due date under Section 139(1). Once opted out, re-entry into the new regime is allowed only once unless business income ceases.

 

• Exclusion from AMT Provisions

Assessees under Section 115BAC are not subject to AMT under Section 115JC or AMT credit provisions under Section 115JD.

• Adjustment of Unabsorbed Depreciation

Unabsorbed depreciation attributable to disallowed deductions shall lapse. However, if the new regime is opted in AY 2024–25, such depreciation may be added to WDV as of 01-04-2023 per Notification No. 43/2023, dated 21-06-2023.

• TDS Intimation by Employees

As per Circular No. 4 of 2023, dated 05-04-2023, employees must inform their tax regime choice annually to employers for TDS purposes. Failure to do so implies a default to the new regime. This intimation does not constitute a formal exercise of the option under Section 115BAC.

 

Alternate Tax Regime for Co-operative Societies [Section 115BAD]

Section 115BAD, introduced by the Finance Act, 2020, provides a concessional tax regime for resident co-operative societies. Under this regime, the total income is taxable at 22% (plus 10% surcharge), subject to specified conditions, including the forfeiture of certain deductions.

• Conditions for Availing the Regime
• Income must be computed without claiming specified deductions.
• No set-off of brought forward losses or depreciation related to such exemptions/deductions.
• Depreciation must be claimed in the prescribed manner, with a cap of 40% on any block of assets.

 

• Disallowed Deductions

The following cannot be claimed under this regime:

• Deduction under Section 10AA (units in SEZ)
• Additional depreciation under Section 32(1)(iia)
• Investment-based deduction in backward areas [Section 32AD]
• Deduction under Sections 33AB, 33ABA (tea/coffee/rubber business, petroleum/natural gas)
• Scientific research and related donations under Section 35
• Capital expenditure deduction for specified businesses [Section 35AD]
• Expenditure on agricultural extension [Section 35CCC]
• Deductions under Chapter VI-A, except under Sections 80JJAA and 80LA(1A)

 

• Tax Rate and Surcharge
• Flat income-tax rate of 22%
• Surcharge at 10% of income tax, irrespective of income level

 

• Procedure to Opt

File Form 10-IF electronically, on or before the due date for filing the return of income under Section 139(1). The option can be exercised from any assessment year starting on or after 01.04.2021.

 

• Irrevocability and Invalidity

Once opted, the co-operative society cannot withdraw from the regime in any subsequent year. If conditions are violated in any year, the option becomes invalid for that and subsequent years, and normal provisions of the Act shall apply

• Exclusion from AMT Provisions

Sections 115JC (AMT) and 115JD (AMT credit) do not apply to co-operative societies opting for Section 115BAD.

• Treatment of Unabsorbed Depreciation

Losses or depreciation from earlier years will lapse permanently to the extent attributable to deductions disallowed under this section. However, if the option is exercised in the first year of applicability (i.e., AY 2021–22), unabsorbed depreciation (attributable to additional depreciation) can be added to the WDV of the block of assets as on 01.04.2020. This adjustment is not allowed if the option is not exercised in the first year.

 

Alternate Tax Regime under Section 115BAE for Manufacturing Co-operative Societies

Section 115BAE, introduced by the Finance Act, 2023, provides a concessional tax regime for resident co-operative societies engaged exclusively in the manufacturing or production of articles or things. This regime is applicable from the assessment year 2024-25, subject to specified conditions.

 

• Eligible Co-operative Societies

To opt for the concessional regime under Section 115BAE, a co-operative society must:

• Be resident in India and incorporated on or after 01.04.2023;
• Be registered under the Co-operative Societies Act, 1912 or any State Act;
• Commence manufacturing or production on or before 31.03.2024;
• Be engaged solely in manufacturing or production and related distribution or research (excluding specified non-eligible businesses such as software development, mining, gas bottling, etc.);
• Not be formed by splitting up or reconstruction of an existing business; and
• Not use previously used machinery, except where the value of such machinery does not exceed 20% of the total plant and machinery, or in case of eligible imported second-hand machinery.

 

• Computation of Total Income

The total income under this regime shall:

• Be computed without claiming specified deductions;
• Exclude carry forward and set-off of losses or depreciation attributable to such exemptions/deductions; and
• Include depreciation calculated as per prescribed rules (maximum 40% for any block of assets as per Notification No. 43/2023 dated 21.06.2023).

 

• Disallowed Deductions

The following deductions are not allowed:

• Section 10AA, 32(1)(iia), 33AB, 33ABA, and Section 35;
• Section 35AD , 35CCC;
• All Chapter VI-A deductions (except Section 80JJAA).

 

• Applicable Tax Rates

The applicable tax rates under Section 115BAE are:

• 15% on income from manufacturing activities;
• 22% on income from non-manufacturing activities (with no expenditure deduction);
• 15% on short-term capital gains from depreciable assets;
• 22% on other short-term capital gains;
• 30% on excess profits due to arranged affairs;
• Special rates for incomes covered under specific provisions;
• A surcharge of 10% and health & education cess of 4% apply.

 

• Procedure to Opt

Eligible co-operative societies must exercise the option in Form 10-IFA electronically, on or before the due date for furnishing the return under Section 139(1) for the relevant previous year. Once exercised, the option applies to all subsequent years and cannot be withdrawn.

• Consequences of Non-compliance

If any condition under Section 115BAE is violated in a previous year, the option becomes invalid for that year and all subsequent years. The regular provisions of the Act then apply.

• Arranged Business Affairs and Excess Profit

Where profits are deemed excessive due to close connection or business arrangement, the Assessing Officer may re-compute such profits on a reasonable basis or as per arm’s length price (for specified domestic transactions). Excess profits shall be taxed at 30%.

• Exemption from AMT

Co-operative societies opting for Section 115BAE are exempt from the Alternative Minimum Tax (AMT). Unutilised AMT credit under Section 115JD shall not be allowed to be carried forward or set off.