Library / Income-tax Act, 2025: The Professional's Master Guide

25. Taxation of Companies: Rates, Regimes and MAT

25.1 Which rate applies?

Company type

Section

Old

Base rate

Surcharge

Effective rate (max)

Domestic company, normal (turnover up to Rs. 400 crore in the specified earlier year)

Finance Act rates

25%

7% above Rs. 1 cr; 12% above Rs. 10 cr

29.12%

Domestic company, normal (other)

Finance Act rates

30%

7% / 12%

34.944%

Manufacturing company set up after 1 March 2016 (option)

199

115BA

25%

7% / 12%

29.12%

Domestic company, concessional regime (option)

200

115BAA

22%

10% flat

25.168%

New manufacturing company (option, for units that began production by the sunset date)

201

115BAB

15%

10% flat

17.16%

Foreign company

Finance Act rates

35%

2% above Rs. 1 cr; 5% above Rs. 10 cr

38.22%

Cess of 4% applies on tax plus surcharge in all cases. Special rate incomes such as capital gains under sections 196 to 198 are taxed at those rates even for companies.

25.2 The concessional regime under section 200 (old 115BAA)

A domestic company can opt to pay tax at 22% (plus 10% surcharge and 4% cess) if it gives up specified incentives. Once exercised, the option cannot be withdrawn.

  • No deduction for SEZ units (section 144, old 10AA), additional depreciation, tea, coffee and rubber development, scientific research weighted deductions, section 46 (old 35AD), agricultural extension, and profit-linked deductions in sections 138 to 152 (except section 146 for additional employees and, subject to the conditions in the Act, section 148 for inter-corporate dividends).
  • Brought forward losses and depreciation attributable to these disallowed deductions cannot be set off.
  • MAT does not apply. Existing MAT credit can be used only as per the Finance Act 2026 rules explained below.
  • The option is exercised in the prescribed form on or before the return due date of the first year.

25.3 Minimum Alternate Tax and Alternate Minimum Tax (section 206)

MAT (old 115JB) applies to companies that remain in the normal regime. If normal tax on taxable income is lower than the MAT rate on book profit, the company pays MAT. Book profit is the net profit in the statement of profit and loss, adjusted for specified items (income tax provided, deferred tax, reserves, provisions for unascertained liabilities, dividends, exempt incomes, lower of brought forward loss and unabsorbed depreciation, and so on). For Ind AS companies, there are further adjustments for other comprehensive income and transition amounts.

Feature

Up to Tax Year 2025-26 (1961 Act)

From Tax Year 2026-27 (Finance Act 2026)

MAT rate

15% of book profit

14% of book profit

MAT credit

Excess of MAT over normal tax carried forward for 15 years

MAT is a final tax. No new credit is created

Use of old credit (normal regime)

Against excess of normal tax over MAT

Continues within the 15-year window, only to the extent normal tax exceeds MAT

Use of old credit (company shifting to section 200)

Not available

Allowed, capped at one fourth of the tax liability in a year

IFSC units

9%

9%

AMT for non-corporates claiming certain deductions (old 115JC)

18.5% of adjusted total income

Section 206(2); check current rate and exemptions for small taxpayers

Illustration 97: Normal regime vs MAT vs section 200

Vardhan Industries Ltd. (turnover Rs. 300 crore) has book profit of Rs. 10 crore. Because of an infrastructure deduction and additional depreciation, its taxable income under the normal regime is only Rs. 3 crore. Under section 200 it would lose those benefits and its taxable income would be Rs. 5 crore.

Option

Working

Tax (Rs.)

Normal tax, old regime

3 crore x 25% x 1.07 x 1.04

83,46,000

MAT (Finance Act 2026)

10 crore x 14% x 1.07 x 1.04

1,55,79,200

Tax payable in old regime (higher of the two)

MAT applies, no credit from 2026-27

1,55,79,200

Section 200 regime

5 crore x 22% x 1.10 x 1.04

1,25,84,000

Moving to section 200 saves about Rs. 30 lakh a year. Before 2026 the company might have stayed in the old regime to build MAT credit, but since MAT is now a final tax, that reason has largely gone. If it has old MAT credit, it can use it after switching, up to one fourth of its tax each year.

Practice note

Prepare a multi-year model before advising on the switch: remaining tax holiday years, additional depreciation pipeline, MAT credit balance and its expiry, and expected profits. The section 200 option is irreversible.

MAT is computed and certified in Form 66 (old 29B); AMT in Form 67 (old 29C).

25.4 Tax provisioning in the books

Finance teams must also get the accounting right. Under Ind AS 12 or AS 22, the tax expense has two parts: current tax (the amount payable for the year) and deferred tax (the tax effect of timing differences between book and tax values).

Illustration 98: Deferred tax on depreciation

A company in the section 200 regime (25.168%) has book WDV of plant of Rs. 8 crore and tax WDV of Rs. 6 crore at year-end. Taxable temporary difference = Rs. 2 crore.

Deferred tax liability = 2 crore x 25.168% = Rs. 50,33,600. The movement in this balance during the year is the deferred tax charge or credit in the statement of profit and loss.

Key point

Always prepare an effective tax rate reconciliation (accounting profit x applicable rate, reconciled to actual tax expense). Auditors and investors review it, and it quickly shows missed disallowances or wrong rates.

25.5 Computing book profit for MAT: the main adjustments

MAT starts from the net profit in the statement of profit and loss prepared under the Companies Act (after exceptional items, before other comprehensive income for Ind AS companies). The Act then requires specific adjustments so that book profit is not manipulated through reserves and provisions.

Add back (if debited)

Reduce (if credited or included)

Income tax paid or payable, and provision for it, including deferred tax

Amounts withdrawn from reserves or provisions, if they were added back earlier

Amounts carried to any reserve

Exempt income (other than certain items), and share of income from AOPs

Provisions for unascertained liabilities

Lower of brought forward loss and unabsorbed depreciation, as per books

Provision for diminution in value of assets

Deferred tax credited

Expenditure relating to exempt income

Notional gains on conversion of assets into stock-in-trade (taxed later)

Dividends paid or proposed

Certain gains on transfer or restructuring as specified

Illustration 99: MAT computation

Kaveri Chemicals Ltd. (normal regime, turnover Rs. 250 crore) reports net profit of Rs. 18 crore after debiting provision for income tax Rs. 4 crore, deferred tax Rs. 50 lakh, and provision for doubtful debts Rs. 1 crore. It credited dividend from an Indian company of Rs. 2 crore (taxable, so no MAT reduction). Brought forward loss as per books is Rs. 3 crore and unabsorbed depreciation as per books is Rs. 5 crore.

Net profit as per statement of profit and loss

18,00,00,000

Add: provision for income tax

4,00,00,000

Add: deferred tax

50,00,000

Add: provision for doubtful debts (unascertained / diminution)

1,00,00,000

Less: lower of brought forward loss (3 crore) and unabsorbed depreciation (5 crore)

(3,00,00,000)

Book profit

20,50,00,000

MAT at 14%

2,87,00,000

Add: surcharge at 12% (book profit above Rs. 10 crore)

34,44,000

Add: cess at 4%

12,85,760

MAT payable if higher than normal tax

3,34,29,760

Surcharge on MAT follows the same thresholds as for normal tax, applied to book profit. MAT is compared with tax on total income under the normal provisions; the higher is payable. From Tax Year 2026-27, no MAT credit arises when MAT is higher.

Judicial view: Book profit

Apollo Tyres Ltd. v. CIT (Supreme Court, 2002): for MAT, the Assessing Officer must accept the profit shown in accounts prepared and certified under the Companies Act, and can make only the adjustments specified in the provision; he cannot recompute the book profit.

25.6 Dividend policy and tax

Since 2020, dividends are taxed in the hands of shareholders, so a company's choice between dividend, buyback and retention has different effects on different shareholders.

Route

Resident individual shareholder (30% slab)

Corporate shareholder

Non-resident shareholder

Dividend

Taxed at slab rate (up to about 35.9% with the 15% surcharge cap and cess)

Taxed at the company's applicable rate, with section 148 deduction if distributed onward

Treaty rate, often 5% to 15%

Buyback (from Tax Year 2026-27)

Capital gains: 12.5% (long-term, above Rs. 1.25 lakh for listed) or 20% (short-term listed); promoters pay more

Capital gains; corporate promoters effective about 22%

Capital gains as per treaty

Retention

Tax deferred until sale of shares

Same

Same

Practice note

For closely held companies with resident individual promoters in the top slab, a buyback may be cheaper than dividends for non-promoter holders but not always for promoters, due to the additional promoter tax. Model after-tax cash for each shareholder group before recommending.

25.7 Corporate tax computation: full illustration

Illustration 100: Current tax for a company under section 200

Sunrise Foods Pvt. Ltd. has opted for section 200. For Tax Year 2026-27, profit before tax in the books is Rs. 12 crore. Book depreciation Rs. 2 crore; tax depreciation Rs. 2.6 crore. CSR spend Rs. 25 lakh. Provision for warranty (not reasonably certain) Rs. 40 lakh. Interest on late GST payment Rs. 5 lakh (compensatory, allowable). Penalty for violation of food safety law Rs. 3 lakh. Dividend received from an Indian company Rs. 50 lakh (taxable). Long-term capital gain on sale of listed shares Rs. 1 crore (included in profit).

Profit before tax

12,00,00,000

Add: book depreciation

2,00,00,000

Add: CSR expenditure

25,00,000

Add: warranty provision not allowable under ICDS X

40,00,000

Add: penalty for violation of law

3,00,000

Less: tax depreciation

(2,60,00,000)

Less: LTCG included in profit (taxed separately)

(1,00,00,000)

Less: dividend (taxed under other sources, shown separately)

(50,00,000)

Business income

10,58,00,000

Add: dividend (other sources)

50,00,000

Income taxable at 22%

11,08,00,000

Tax at 22%

2,43,76,000

LTCG on listed shares (section 198): 12.5% on Rs. 98,75,000 (after Rs. 1,25,000 exemption)

12,34,375

Surcharge 10% on total tax (concessional regime flat 10%)

25,61,038

Cess 4%

11,26,857

Current tax

2,92,98,270

Two practical points. First, the Rs. 1,25,000 exemption under section 198 applies to every assessee, including companies. Second, companies in section 200 pay a flat 10% surcharge irrespective of income, which is why the effective rate is 25.168%.

Chapter summary

• Domestic companies choose between normal rates (25% or 30%) and section 200 (22%, effective 25.168%).

• MAT is 14% of book profit from Tax Year 2026-27 and is a final tax.

• Old MAT credit can be used up to one fourth of tax after switching to section 200.

• Model the switch year using multi-year projections; the option is irreversible.

© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.