What Is Corporate Tax? Types of Corporate Tax in India Explained
Corporate tax in India is the tax companies pay on their profits. So, understanding types of corporate tax and current corporate tax rates is crucial both for businesses and for investors analysing after‑tax earnings.
What Is Corporate Tax?
Corporate tax is a direct tax charged on the profits of companies registered in India or earning income from India. Once a company calculates its profit after allowable expenses and deductions, it applies the applicable corporate tax rate to arrive at its income‑tax liability.
Who is liable to pay corporate tax in India?
In India, both domestic and foreign companies are liable to pay corporate tax on income that is taxable under the Income‑tax Act.
Domestic companies: Companies that are set up or treated as resident in India, must pay corporate tax in India on income they earn both within India and anywhere else in the world.
Foreign companies: Companies incorporated outside India but earning income from India (for example, through a branch, permanent establishment, royalties, fees for technical services, or interest) are taxed on India‑sourced income only.
Partnership firms, LLPs and sole proprietorships are not ‘companies’ for this purpose and are taxed under separate provisions of the Income Tax Act.
What Are the Types of Corporate Tax in India?
In practice, corporate taxation in India consists of a few main components:
Basic corporate income tax: The core tax on profits, with different rates for domestic and foreign companies and optional concessional regimes (like Sections 115BAA and 115BAB for domestic companies).
Surcharge on corporate tax: An additional percentage on the basic tax when income exceeds specified thresholds
.. For companies, surcharge works like a top‑up on the basic corporate tax.
Domestic companies (old/normal regime):
No surcharge up to ₹1 crore taxable income.
7% surcharge on the basic tax if income is above ₹1 crore and up to ₹10 crore.
12% surcharge if income exceeds ₹10 crore.
Domestic companies under 115BAA / 115BAB:
Flat 10% surcharge on the basic tax, regardless of income level.
Foreign companies:
2% surcharge on tax where income is above ₹1 crore up to ₹10 crore
5% surcharge where income exceeds ₹10 crore.
Health and education cess: A flat 4% on the total of income tax plus surcharge, applicable to both domestic and foreign companies.
Dividend Distribution Tax:
,Earlier, companies also had to pay a Dividend Distribution Tax (DDT) out of their profits when they declared dividends, so most dividends were tax‑free for shareholders. From 1 April 2020, DDT has been abolished, and dividends are now taxed directly in the hands of shareholders at their applicable tax rates, with companies only responsible for deducting TDS at source where required.
Minimum Alternate Tax (MAT): A backup tax that applies when the normal taxable income is very low, but the company reports significant book profits.
Current MAT framework (up to 31 March 2026):
Standard MAT rate: 15% of book profits, plus applicable surcharge and 4% cess.
Lower 9% MAT (plus surcharge & cess) for eligible units in IFSCs that earn income only in convertible foreign exchange.
Companies that opt for Sections 115BAA or 115BAB are fully exempt from MAT.
How MAT will change from April 1, 2026?
From Tax Year 2026–27 under the new Income‑tax Act, 2025:
MAT rate is proposed to be reduced from 15% to 14% of book profits.
MAT will become a final tax for that year – i.e., no fresh MAT credit will accumulate after 1 April 2026.
Existing MAT credit (up to 31 March 2026) can still be used, but only under the simplified regime and only to the extent of up to 25% of that year’s tax liability.
Domestic corporate tax rates – Old vs optional regimes
(old) regime with basic rates
For FY 2025–26, under the standard regime:
25% corporate tax if the company’s turnover/gross receipts in the specified previous year (currently FY 2020–21) do not exceed ₹400 crore.
30% corporate tax for all other domestic companies under the normal regime, with all the deductions and tax incentives.
Surcharge of 7% or 12% at higher income levels and 4% cess apply, which increase the effective rate.
Optional concessional regimes – 115BAA and 115BAB
Section 115BAA (for any domestic company):
Optional flat 22% tax rate, regardless of turnover or income size.
Plus 10% surcharge and 4% cess → effective ~25.17%.
To opt in, the company must give up specified deductions and incentives (e.g., additional depreciation, most profit‑linked deductions, SEZ benefits, etc.), but MAT does not apply.
Section 115BAB (for new manufacturing companies):
Optional 15% tax rate for eligible domestic manufacturing companies incorporated on or after 1 October 2019 that start manufacturing on or before 31 March 2024 and meet conditions.
Plus 10% surcharge and 4% cess → effective ~17.16%.
Again, they must forego most incentives and deductions, and MAT is not applicable
Corporate Tax on Domestic Companies
Corporate tax meaning for domestic companies: Tax on total income of Indian‑resident companies, with options between normal and concessional rates.
Standard (old) regime – basic rates
For FY 2025–26 (broad framework in line with recent years):
This 25% rate is part of the domestic-company tax schedule under the Income-tax Act, 1961, and applies where the company’s turnover or gross receipts in the specified previous year do not exceed ₹400 crore..
On top of this, surcharge of 7% or 12% applies at higher income levels, plus 4% health and education cess.
Concessional regimes – Sections 115BAA and 115BAB
To make India more competitive, two key concessional corporate tax regimes exist:
Section 115BAA – for all domestic companies
Flat 22% corporate tax rate.
Effective rate about 25.17% after 10% surcharge and 4% cess.
If companies opt for 115BAA they must forgo most deductions and incentives, but they are exempt from MAT.
Section 115BAB – for new manufacturing companies
The 15% regime under Section 115BAB is only available to new manufacturing companies that begin production on or before 31 March 2024, so it effectively has a sunset date.
Effective rate about 17.16% after surcharge and cess.
These companies also do not pay MAT but must forgo most incentives. for example, additional depreciation on new plant and machinery, SEZ and profit‑linked deductions (like sections 10AA, 80‑IA, 80‑IB, 80‑IAC), and investment‑ or R&D‑linked deductions such as sections 35, 35AD, 35CCC and 35CCD, except a few like 80JJAA and 80M that are still allowed.
Corporate Tax on Foreign Companies
Foreign companies are taxed on income that accrues or arises in India or is deemed to do so.
The base corporate tax rate for foreign companies is generally around 35%, subject to surcharge and cess.
Effective rates vary with income brackets, as surcharges (2% or 5%) and 4% health and education cess are applied.
Certain types of income (royalties, fees for technical services, interest, etc.) may be subject to withholding tax at source (often 10%–20%), with scope for relief under Double Taxation Avoidance Agreements (DTAAs).
Foreign companies without a permanent establishment (PE) in India may not be subject to MAT, and some special conditions apply under transfer pricing and anti‑avoidance rules.
Corporate Tax Rates in India (Snapshot)
Corporate Tax Rates in India – Quick Snapshot (current law)
Domestic companies – normal regime
25% basic tax if turnover in the previous year is up to ₹400 crore as per section 115BA.
30% basic tax for other domestic companies under the regular tax provisions.
Surcharge: 7% (income >₹1 crore–₹10 crore) or 12% (income >₹10 crore) + 4% health & education cess on tax plus surcharge.
Domestic companies – optional concessional regimes
Section 115BA: flat 22% tax, plus 10% surcharge and 4% cess → effective ~25.17%; MAT not applicable; company must forgo most deductions/incentives
Section 115BAB (new manufacturing companies meeting conditions and sunset dates): flat 15% tax, plus 10% surcharge and 4% cess → effective ~17.16%; MAT not applicable; most incentives not available.
Foreign companies
Base rate generally 40% on income taxable in India (with a few special legacy rates).
Surcharge: 2% (income >₹1 crore–₹10 crore) or 5% (income >₹10 crore) + 4% cess; effective tax typically in the high‑30s overall.
Minimum Alternate Tax (MAT)
Standard MAT: 15% of book profits, plus surcharge and 4% cess.
Lower MAT: 9% of book profits (plus surcharge & cess) for specified IFSC units.
MAT does not apply to companies that have opted for Sections 115BAA or 115BAB.
Health and education cess
4% on the total of income tax plus surcharge for all companies, domestic and foreign.
How Corporate Tax Affects Business
Corporate tax directly reduces net profit after tax (PAT), which in turn affects:
Earnings per share (EPS) – lower tax rates mean higher EPS for the same pre‑tax profit.
Retained earnings and reserves – more post‑tax profit can be reinvested into the business or used to pay dividends to shareholders.
Valuation multiples – investors typically value companies on earnings. a lower effective corporate tax rate can support higher valuations if it’s sustainable.
When companies shift to concessional regimes (22% or 15%), it often leads to a one‑time step‑up in after‑tax earnings, but at the cost of giving up certain deductions and incentives.
Key Differences Between Domestic and Foreign Corporate Tax
Aspect | Domestic Companies | Foreign Companies |
|---|---|---|
Residency | Registered/controlled in India | Incorporated abroad |
Tax base | Global income of the company | Only India‑sourced income |
Standard rate | 25% / 30% (with options for 22%/15% concessional) | Around 35% base |
MAT | Generally applicable at 15% on book profits (with exemptions) | Often not applicable where no PE, special rules apply |
Access to concessional regimes | Can opt for 115BAA/115BAB if conditions met | Not eligible for these domestic concessional regimes |
DTAA relief | Not relevant for ‘domestic vs India’ | Crucial for avoiding double taxation and reducing withholding |
Importance of corporate tax knowledge for investors
For investors, understanding corporate tax meaning and structure helps in multiple ways:
Evaluating net profit quality: whether high earnings are due to operating strength or temporarily low tax.
Assessing the impact of tax policy changes: for example, shifts to 22%/15% regimes, MAT changes, or new incentives for specific sectors.
Comparing companies: Two firms with similar pre‑tax margins can have very different effective tax rates, altering their relative valuations.
Understanding dividend capacity: After‑tax profits determine how much can be distributed or reinvested.
Corporate tax in India is more than just a single rate, it is a layered system combining basic corporate income tax, MAT, surcharge and health/education cess, with distinct rules for domestic and foreign companies.
Domestic companies can now opt for lower concessional rates (22% or 15%) under Sections 115BAA and 115BAB in exchange for giving up most incentives. Foreign companies face higher base rates but can rely on treaties to ease withholding on cross‑border payments. For investors, tracking these types of corporate tax and the effective tax rate is essential for judging profitability, cash flows and long‑term value.
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FAQ
Corporate tax is payable by companies on their taxable profits:
- Domestic companies (incorporated or resident in India) on their global income.
- Foreign companies on income that accrues, arises or is deemed to arise in India, such as business profits through a PE, royalties, fees for technical services, or interest from India.