Quick Answer
14 min read|Updated: Apr 1, 2026|Income-tax
Quick Answer: For AY 2026-27 under the Income Tax Act 2025, domestic companies pay tax at 22% (Section 115BAA, effective 25.17%), 15% (Section 115BAB for new manufacturing, effective 17.16%), 25% (turnover up to Rs 400 crore), or 30% (others). MAT continues at 15% of book profits.
7. Foreign Company Taxation
Foreign companies earning income in India are taxed at a flat rate of 40% on their Indian-sourced income. The concessional regimes under 115BAA and 115BAB are not available to foreign companies. Surcharge rates for foreign companies differ from domestic companies: 2% (income between Rs 1 crore and Rs 10 crore) and 5% (income exceeding Rs 10 crore), plus 4% cess.
Key considerations for foreign companies:
- Income may be taxed at treaty rates under applicable DTAA if more beneficial — see our NRI and DTAA taxation guide
- Branch profits (attributable to Permanent Establishment in India) taxed at 40% plus applicable surcharge and cess
- Royalties and fees for technical services: 10% under most DTAAs, or domestic rate of 40% if DTAA rate is not beneficial
- No MAT applicability on foreign companies not having a place of business or a PE in India
- Where DTAA exists, the rate is the more beneficial of treaty rate or domestic law rate — taxpayer-favourable interpretation applies
8. Minimum Alternate Tax (MAT) — 15% of Book Profits
MAT ensures that profitable companies with significant book profits cannot entirely escape tax liability by using deductions and exemptions. Under the 2025 Act, the MAT rate continues at 15% of book profits (plus applicable surcharge and cess).
Key MAT provisions:
- Applicability: All companies EXCEPT those opting for 115BAA or 115BAB
- Rate: 15% of book profits (reduced from 18.5% vide Finance Act 2020)
- Book profits: Net profit as per Profit & Loss account prepared under Companies Act 2013, adjusted for specified additions and deductions under Explanation 1 to the MAT provision
- For foreign companies: MAT applies only if the company has a place of business in India and prepares P&L account under Indian companies legislation or as per agreement with the Government of India
- Units in IFSC: MAT rate is 9% of book profits for companies operating in International Financial Services Centre (IFSC)
MAT Computation Format
| Particulars | Amount (Rs) |
|---|---|
| Net Profit as per Profit & Loss Account (Companies Act 2013) | XX,XX,XXX |
| Add back: | |
| (a) Income tax paid or payable and provision therefor | XX,XXX |
| (b) Amount transferred to any reserve | XX,XXX |
| (c) Provision for unascertained liabilities | XX,XXX |
| (d) Provision for diminution in value of assets | XX,XXX |
| (e) Provision for losses of subsidiary companies | XX,XXX |
| (f) Dividends paid or proposed | XX,XXX |
| (g) Depreciation debited to P&L (including deferred tax debit) | XX,XXX |
| Less: | |
| (h) Amount withdrawn from reserves (if added back earlier) | (XX,XXX) |
| (i) Income exempt under Section 10/11/12 (subject to conditions) | (XX,XXX) |
| (j) Depreciation as per books (excluding deferred tax debit) | (XX,XXX) |
| (k) Brought forward loss or unabsorbed depreciation per books (whichever is lower) | (XX,XXX) |
| (l) Deferred tax credit | (XX,XXX) |
| Book Profit for MAT purposes | XX,XX,XXX |
| MAT @ 15% of Book Profit | X,XX,XXX |
| Add: Surcharge (7% or 12%) + Cess (4%) | XX,XXX |
| Total MAT Liability | X,XX,XXX |
The company pays the higher of regular tax liability or MAT. If MAT exceeds regular tax, the difference is available as MAT credit.
9. MAT Credit Carry Forward and Set-Off
When MAT paid exceeds regular tax liability, the difference constitutes MAT credit. Under the 2025 Act:
- Carry forward period: 15 assessment years from the year in which the credit arises
- Set-off mechanism: In any subsequent year where regular tax exceeds MAT, the MAT credit (to the extent of the excess) can be claimed
- Lost on opting 115BAA/115BAB: Since MAT itself does not apply under 115BAA/115BAB, accumulated MAT credit cannot be utilised and is permanently forfeited upon exercising the option
- Transition from 1961 Act: MAT credit balance as on the transition date carries forward under the 2025 Act — refer to our transitional provisions guide
- No interest: MAT credit does not carry interest; it is simply a set-off mechanism
Example: XYZ Ltd has regular tax liability of Rs 80 lakh and MAT of Rs 95 lakh for AY 2026-27. It pays Rs 95 lakh (MAT being higher). MAT credit = Rs 15 lakh. In AY 2027-28, if regular tax is Rs 1.10 crore and MAT is Rs 90 lakh, the company can set off Rs 15 lakh of MAT credit, reducing net tax to Rs 95 lakh. The credit can be utilised until AY 2041-42.
10. LLP and Partnership Firm Tax Rates
| Parameter | LLP / Partnership Firm | Domestic Co. (Normal) | Domestic Co. (115BAA) |
|---|---|---|---|
| Base tax rate | 30% | 30% | 22% |
| Surcharge (income above Rs 1 Cr) | 12% | 7% | 10% (flat) |
| Cess | 4% | 4% | 4% |
| Maximum effective rate | 34.94% | 34.94% | 25.17% |
| MAT / AMT applicable | AMT at 18.5% | MAT at 15% | Not applicable |
| 115BAA option available | No | Yes | Already opted |
| Partner/Director remuneration | Deductible (Sec 40(b) limits) | Director salary deductible | Director salary deductible |
| Profit distribution tax | Exempt in partner hands (Sec 10(2A) equivalent) | Dividend taxable in shareholder hands | Dividend taxable in shareholder hands |
Partner remuneration limits for firms/LLPs (Section 40(b) equivalent):
- On first Rs 6,00,000 of book profit (or in case of loss): Rs 1,50,000 or 90% of book profit, whichever is higher
- On balance of book profit: 60% of book profit
- Interest on capital: maximum 12% p.a. simple interest
Partners are taxed on salary and interest received from the firm as business income. Their share of profit (after deducting partner remuneration at the firm level) is exempt under Section 10(2A) equivalent of the 2025 Act — avoiding double taxation.
11. Alternate Minimum Tax (AMT)
AMT applies to non-corporate taxpayers (individuals, HUFs, AOPs, BOIs, firms, and LLPs) claiming specified deductions. Under the 2025 Act:
- Rate: 18.5% of adjusted total income (plus applicable surcharge and cess)
- Triggered when: Regular tax payable is less than 18.5% of adjusted total income
- Adjusted total income: Total income as computed under normal provisions + deductions claimed under 80-IA, 80-IAB, 80-IAC, 80P, 35AD, and similar specified deductions
- AMT credit: Excess of AMT paid over regular tax can be carried forward for 15 years and set off against excess of regular tax over AMT in subsequent years
- Exemption threshold: AMT does NOT apply to individuals, HUFs, AOPs, BOIs, and artificial juridical persons whose adjusted total income does not exceed Rs 20 lakh
AMT is the non-corporate equivalent of MAT, ensuring that entities enjoying significant deductions still pay a minimum level of tax. For startups claiming 80-IAC deduction, AMT can be a significant consideration — see our startup taxation guide.
12. DDT Abolition and Buyback Tax
Dividend Distribution Tax (DDT): Abolished with effect from AY 2021-22 and remains abolished under the 2025 Act. Under the current framework, dividends are taxable in the hands of the recipient shareholder at applicable slab rates. The company deducts TDS at 10% under Section 194 equivalent when aggregate dividend exceeds Rs 5,000 per shareholder per financial year. For details on TDS provisions, see our TDS rate chart for AY 2026-27.
Buyback Tax — Shift to Shareholder Level: From 1 October 2024 (via Finance (No. 2) Act 2024 amendment), the taxation of buyback has shifted from the company level to the shareholder level. Under the 2025 Act framework:
- Consideration received by shareholders on buyback is treated as deemed dividend, taxable at shareholder slab rates
- The cost of acquisition of the bought-back shares is treated as a capital loss, which can be set off against capital gains
- Companies no longer pay the erstwhile 20% (plus surcharge and cess) buyback tax on distributed income
- TDS is deducted by the company at 10% on the buyback consideration deemed as dividend
13. 115BAA vs 115BAB vs Normal Rate — Decision Matrix
| Feature | 115BAA (22%) | 115BAB (15%) | Normal Regime |
|---|---|---|---|
| Effective rate (maximum) | 25.17% | 17.16% | 34.94% |
| Eligible entities | Any domestic company | New mfg co. (post 1 Oct 2019) | All companies |
| Chapter VI-A deductions (80-IA etc.) | Not available | Not available | Available |
| Additional depreciation u/s 32(1)(iia) | Not available | Not available | Available |
| Section 35AD investment deduction | Not available | Not available | Available |
| MAT applicable | No | No | Yes (15%) |
| Loss carry-forward from exempt years | Forfeited | Forfeited | Available (8 years) |
| Option reversible? | No — irrevocable | No — irrevocable | Default (no opt-in needed) |
| Surcharge cap | Flat 10% | Flat 10% | Up to 12% |
| Section 80JJAA (employment) allowed | Yes | Yes | Yes |
| Best suited for | Companies with few deductions | New manufacturing units | Companies with heavy deductions/losses |
14. Changes from the 1961 Act
The corporate tax framework under the 2025 Act largely continues the regime established through amendments to the 1961 Act from 2019 onward. Key continuity and changes:
- Continued: 115BAA at 22%, 115BAB at 15%, surcharge rates, cess at 4%
- Continued: MAT at 15% of book profits (rate reduced from 18.5% via Finance Act 2020)
- Continued: DDT abolition (effective from FY 2020-21 onward)
- Changed: Buyback tax shifted from company to shareholder level from October 2024
- Changed: Section numbering reorganised throughout — refer to our section number mapping guide for cross-references
- Simplified: Penalty provisions for non-compliance rationalised — see penalties and interest guide
- Continued: 115BAC (new tax regime for individuals) — now default for non-corporate taxpayers as well
For a detailed comparison of the 1961 Act and 2025 Act across all provisions, see our transition guide.
Expert Insight — CA V. Viswanathan
The 115BAA regime at 25.17% effective rate remains the default choice for most domestic companies that do not have significant accumulated deductions or MAT credit. However, companies with substantial MAT credit balances — particularly those with 8-10 years of remaining credit life — or ongoing Chapter VI-A deductions (80-IA, 80-IAB) with several years of unexpired benefit should perform a rigorous NPV (net present value) analysis before opting in. The irrevocability clause means this is a one-way door. For new manufacturing entities meeting the criteria, 115BAB at 17.16% is the most tax-efficient route in India. LLPs contemplating conversion to companies should factor in the significant rate differential — 34.94% for LLPs versus 25.17% under 115BAA — but must also consider the compliance burden, DDT equivalent considerations, and stamp duty on conversion. For entity structuring, valuation, and regime selection advisory, contact our team.
Key Takeaways
- Section 115BAA: 22% base rate, 25.17% effective — available to any domestic company, irrevocable, no Chapter VI-A deductions (except 80JJAA)
- Section 115BAB: 15% base rate, 17.16% effective — for new manufacturing companies incorporated after 1 October 2019
- Normal rate: 30% (effective up to 34.94%) with full access to deductions, exemptions, and additional depreciation
- Turnover-based rate: 25% for companies with turnover up to Rs 400 crore in FY 2023-24
- MAT at 15% of book profits applies only to normal regime companies — NOT to 115BAA/115BAB
- Foreign companies pay 40% (effective up to 43.68%) with no access to concessional regimes
- LLPs and firms: 30% flat + 12% surcharge above Rs 1 crore + 4% cess = 34.94% maximum
- DDT abolished since AY 2021-22 — dividends taxable in shareholder hands
- Buyback tax shifted to shareholder from 1 October 2024 — deemed dividend treatment
- AMT at 18.5% applies to non-corporate entities claiming specified deductions (threshold: Rs 20 lakh ATI)
Frequently Asked Questions — Corporate Tax Rates AY 2026-27
Q: What is the corporate tax rate for domestic companies in India for AY 2026-27?
Domestic companies are taxed at 30% (general rate), 25% (turnover up to Rs 400 crore in FY 2023-24), 22% under Section 115BAA, or 15% under Section 115BAB for new manufacturing companies. Surcharge ranges from 7%-12% for the normal regime or a flat 10% for concessional regimes. Health & Education Cess of 4% applies on all. The effective rates range from 17.16% (115BAB) to 34.94% (normal regime, income above Rs 10 crore).
Q: What is the effective tax rate under Section 115BAA?
The effective tax rate under Section 115BAA is 25.17%. Calculation: 22% base rate + 10% surcharge on tax (2.2%) = 24.2%. Health & Education Cess at 4% of 24.2% = 0.968%. Total effective rate = 25.168%, rounded to 25.17%. This rate is uniform regardless of income level since the surcharge is a flat 10%.
Q: What is the MAT rate under the Income Tax Act 2025?
MAT continues at 15% of book profits under the 2025 Act (the rate was reduced from 18.5% by Finance Act 2020). It applies to companies that have NOT opted for 115BAA or 115BAB. Book profits are computed by adjusting the net profit as per the P&L account prepared under the Companies Act 2013 for specified additions and deductions. MAT credit (excess of MAT over regular tax) can be carried forward for 15 years.
Q: Can a company switch back after opting for Section 115BAA?
No. The option under Section 115BAA is irrevocable. Once a company files Form 10-IC (or its equivalent under the 2025 Act) and opts for the 22% concessional regime, it cannot revert to the normal 30%/25% regime in any subsequent assessment year. Companies must perform thorough analysis of foregone deductions, MAT credit, and brought-forward losses before exercising this option.
Q: What is the tax rate for foreign companies in India?
Foreign companies are taxed at 40% on Indian-sourced income. Surcharge is 2% (income Rs 1 crore to Rs 10 crore) or 5% (above Rs 10 crore), plus 4% cess. Effective rate ranges from 41.60% to 43.68%. Foreign companies cannot opt for 115BAA or 115BAB. Where a DTAA exists, the more beneficial of the treaty rate or domestic rate applies to the foreign company.
Q: Is Dividend Distribution Tax still applicable under the 2025 Act?
No. DDT was abolished from AY 2021-22 and remains abolished under the Income Tax Act 2025. Dividends are now taxable in the hands of shareholders at their applicable slab rates. The company paying dividend is required to deduct TDS at 10% under Section 194 (equivalent) when the aggregate dividend to a shareholder exceeds Rs 5,000 in a financial year. Shareholders can claim credit for TDS while filing their return.
Q: What is AMT and who does it apply to?
AMT (Alternate Minimum Tax) at 18.5% of adjusted total income applies to non-corporate taxpayers — partnership firms, LLPs, individuals, HUFs, AOPs, and BOIs — who claim specified deductions under Chapter VI-A (80-IA, 80-IAB, 80-IAC, 80P) or Section 35AD. It does not apply if the adjusted total income does not exceed Rs 20 lakh (for individuals, HUFs, AOPs, BOIs, and artificial juridical persons). AMT credit can be carried forward for 15 years.
Q: How long can MAT credit be carried forward?
MAT credit can be carried forward for 15 assessment years from the assessment year in which the credit arises. It can be set off in any subsequent year where the regular tax liability computed under normal provisions exceeds the MAT liability for that year. If the company subsequently opts for Section 115BAA, all accumulated MAT credit is permanently forfeited since MAT no longer applies under the concessional regime.
Q: What is the tax rate for LLPs and partnership firms for AY 2026-27?
LLPs and partnership firms are taxed at a flat rate of 30% on total income. A surcharge of 12% applies if total income exceeds Rs 1 crore. Health & Education Cess of 4% applies on tax plus surcharge, making the maximum effective rate 34.94%. They cannot opt for 115BAA or 115BAB (these are only for domestic companies). AMT at 18.5% of adjusted total income applies to firms/LLPs claiming specified deductions.
Q: What is the surcharge rate for companies opting for 115BAA or 115BAB?
Companies under Section 115BAA or 115BAB pay a flat surcharge of 10% on income tax, irrespective of the quantum of total income. This is a key benefit — under the normal regime, surcharge is graduated at 7% (above Rs 1 crore) and 12% (above Rs 10 crore). The flat 10% surcharge under concessional regimes makes the effective rate predictable and uniform, which is advantageous for large companies that would otherwise face the 12% surcharge tier.
Disclaimer: This article is for educational purposes and does not constitute legal or tax advice. Consult a qualified chartered accountant for advice specific to your situation. For professional assistance with corporate tax planning, entity structuring, or valuation, visit Virtual Auditor.
