Section 115BAB: 15% Tax for New Manufacturing Companies
- Section 115BAB offers a 15% corporate tax rate for new manufacturing companies in India to boost domestic production and attract foreign investment.
- Eligible companies must be incorporated after October 1, 2019, and start production by March 31, 2024, focusing solely on manufacturing.
- Companies cannot claim deductions or exemptions under other tax sections, simplifying tax compliance for eligible businesses.
- Businesses involved in services or prohibited manufacturing, like tobacco, are excluded from this tax benefit.
- Companies must file Form 10-ID electronically to opt for Section 115BAB and maintain compliance with specific eligibility norms.
The 15% rate depends on meeting the eligibility conditions each year and correctly identifying income not connected with manufacturing.
This guide is for business owners, directors, finance teams and tax professionals handling an eligible manufacturing company. It explains the current law, tax rates, eligibility conditions, deductions, minimum alternate tax treatment and records the company should maintain. It does not determine whether a particular industrial process legally qualifies as manufacturing.
Keep Plant and Machinery Records Review-Ready with BUSY
Organise fixed-asset accounts and depreciation schedules for professional review of Section 115BAB or Section 201 records.
How Section 115BAB Applies in 2026
The Income-tax Act, 1961 was repealed from 1 April 2026. Its section 115BAB now corresponds to section 201, read with section 205, of the Income-tax Act, 2025.
The change in section number does not cancel an existing option. Section 536(2)(f) of the Income-tax Act, 2025 treats a valid option under the old Act as an option under the corresponding provision of the new Act.
| Income period | Governing provision |
|---|---|
| Financial year 2025-26, reported in Assessment Year 2026-27 | Section 115BAB of the Income-tax Act, 1961 |
| Income earned from 1 April 2026 | Sections 201 and 205 of the Income-tax Act, 2025 |
Income period
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Income period
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Assessment Year 2026-27 remains governed by the old Act even though its return is filed after 1 April 2026. Under the new Act, income earned during financial year 2026-27 is referred to as tax year 2026-27.
How the Option Is Exercised
Under the old Act, an eligible company exercised the option by submitting Form 10-ID on or before the due date of its first applicable return. The option was one-time and could not be withdrawn. A company that validly exercised the option does not need to submit Form 10-ID again solely because the law changed.
For the new Act, Rule 136 of the Income-tax Rules, 2026 states that the section 201 option is exercised through the return of income. It does not prescribe a separate form. This rule does not reopen the manufacturing deadline.
Tax Rates Under Section 201
| Type of income | Base tax rate |
|---|---|
| Qualifying income covered by section 201 | 15% |
| Income not connected with manufacturing and not covered by another tax rate | 22%, calculated without deducting any expense or allowance |
| Short-term capital gains on an asset for which depreciation is not allowable | 22% |
| Income covered by another special-rate provision | Applicable special rate |
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The effective tax rate is the total rate after adding surcharge and health and education cess.
For qualifying income taxed at 15%:
| Type of income | Base tax rate |
|---|---|
| Qualifying income covered by section 201 | 15% |
| Income not connected with manufacturing and not covered by another tax rate | 22%, calculated without deducting any expense or allowance |
| Short-term capital gains on an asset for which depreciation is not allowable | 22% |
| Income covered by another special-rate provision | Applicable special rate |
Type of income
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Type of income
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Income taxed at the 22% base rate has an effective rate of 25.168% after the same surcharge and cess.
The 15% rate does not apply automatically to every type of income earned by the company. Each source of income must be classified before the final tax is calculated.
Eligibility Conditions
Company Registration and Manufacturing Date
The company must be a domestic company that:
- Was set up and registered on or after 1 October 2019.
- Began manufacturing or production on or before 31 March 2024.
- Exercised the tax option within the prescribed time.
The Central Board of Direct Taxes recorded the extension of the manufacturing deadline from 31 March 2023 to 31 March 2024 in Circular No. 23/2022.
Incorporation before the deadline is not enough. Actual manufacturing or production must also have started by the deadline.
Business Formation
The company must not be created by splitting up or reconstructing an existing business, except in the limited circumstances recognised by the Act.
For example, forming a new company and transferring an existing factory, workforce and operating business to it does not automatically create a new manufacturing business for this provision.
Plant and Machinery
Previously used plant and machinery is restricted. Two exceptions are important:
- Machinery used outside India is permitted if it was never used in India, is imported into India and no Indian depreciation deduction was previously allowed on it.
- Other previously used plant and machinery is permitted where its value does not exceed 20% of the total value of plant and machinery used by the company.
The company should support this calculation with invoices, import documents, valuations and its fixed-asset register. Equipment does not become new merely because the company has acquired it for the first time.
Document Manufacturing Activity with BUSY
Record material consumption and follow inventory through production stages to finished output.
Permitted and Excluded Activities
| Permitted activities | Excluded activities |
|---|---|
| Manufacturing or producing articles or things | Software development |
| Research related to the company’s manufactured products | Mining |
| Distribution of the company’s manufactured products | Converting marble blocks or similar items into slabs |
| Electricity generation | Bottling gas into cylinders |
| Printing books | |
| Producing cinematograph films | |
| Any other business notified by the Central Government |
Permitted activities
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Whether an activity qualifies as manufacturing depends on the actual production process, not only the company’s business name, licence or product description.
Which Tax Option Applies to Your Company?
Section 200 is the 22% tax option available to domestic companies that meet its conditions. It replaces former section 115BAA.
| Your position | What applies |
|---|---|
| Met all eligibility conditions, began manufacturing by 31 March 2024 and opted on time | Continue under section 201 and review the conditions every year |
| Began manufacturing after 31 March 2024 | Section 201 is not available; compare section 200 with the regular corporate tax rules |
| The section 201 option becomes invalid because of a machinery, building or business activity condition | The company may opt for section 200 under section 200(7) |
| Holds old MAT credit and exercises the section 200 or section 201 option for a tax year beginning on or after 1 April 2026 | Eligible credit can reduce up to 25% of the tax payable, subject to the original 15-year limit |
Your position
What applies
Your position
What applies
Your position
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Your position
What applies
Deductions, Depreciation and Losses
The lower rate requires the company to give up specified deductions and exemptions listed in sections 201 and 205. Unabsorbed depreciation means depreciation that could not be set off against income in earlier years. Losses and unabsorbed depreciation linked to restricted deductions cannot be used under this regime.
| Item | Treatment |
|---|---|
| Normal business expenses | Allowed against manufacturing income taxed at 15%; not allowed against income taxed under the 22% rule |
| Normal depreciation on eligible assets | Allowed at the prescribed rate |
| Additional depreciation and specified incentives | Not allowed |
| Losses linked to restricted deductions | Cannot be set off or carried forward under this regime |
Item
Treatment
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The company should check its asset values after tax depreciation, unused losses and deductions before comparing the tax options. A lower rate does not produce a saving if the company loses deductions of greater value.
Minimum Alternate Tax and Old Credit
Minimum alternate tax (MAT) does not apply to a company using section 115BAB or section 201. MAT credit is unused credit from MAT paid in an earlier year.
From 1 April 2026, a domestic company that chooses section 200 or section 201 for that tax year can use eligible old MAT credit to reduce up to 25% of its tax payable for the year.
For example, if an eligible company has tax payable of ₹10 lakh, it can use up to ₹2.5 lakh of old MAT credit. The remaining credit can be used in later years, but only within its original 15-year time limit.
Related-Party Transactions
Related-party transactions are dealings between the company and connected people or businesses, such as promoters and group companies. If connected businesses use prices that shift excess profit to the eligible company, the Assessing Officer can replace that profit with a reasonable amount. The extra profit is taxed at a 30% base rate.
Companies should support related-party prices with agreements, cost calculations, comparable prices and reasons for management fees, royalties, purchases or sales.
Worked Tax Example
Assume an eligible company has:
- ₹4 crore of qualifying manufacturing income.
- ₹20 lakh of gross income not connected with manufacturing, with no expenses deducted.
- No special-rate capital gains, tax credits or further adjustments.
| Calculation | Amount |
|---|---|
| Tax on ₹4 crore | ₹60,00,000 |
| Tax on ₹20 lakh | ₹4,40,000 |
| Tax before surcharge and cess | ₹64,40,000 |
| Surcharge | ₹6,44,000 |
| Health and education cess | ₹2,83,360 |
| Total tax | ₹73,67,360 |
Calculation
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If the entire ₹4.20 crore were taxed at 22% under section 200, tax after surcharge and cess would be ₹1,05,70,560, a difference of ₹32,03,200.
This calculation is illustrative. The actual result depends on income classification, restricted deductions, losses, special-rate income and available tax credits.
Records That Support Eligibility
A focused evidence file should establish five points:
- Formation: Incorporation records, registrations and evidence that the business was not reconstructed from an existing operation.
- Commencement: Factory approvals, first production records, raw-material consumption, finished-goods records and initial sales invoices.
- Assets: Purchase invoices, import documents, asset registers and the calculation supporting the 20% used-machinery limit.
- Tax treatment: Form 10-ID acknowledgement, returns, depreciation schedules, loss workings and MAT credit records.
- Transactions: Production records, income classification workings and support for related-party prices.
The records should show what the company manufactured, when production started, which assets were used and how each source of income was taxed.
If production, inventory and tax records are maintained in separate systems, review BUSY accounting software to determine whether it fits the company’s recordkeeping process.
Conclusion
The value of section 115BAB depends on continued compliance, not only the 15% headline rate. A company must prove when manufacturing began, how its machinery was acquired and how each source of income was taxed. The move to section 201 does not cancel a valid option, but it changes how the provision is referenced from 1 April 2026. Before filing the return, check the company’s eligibility evidence, depreciation, losses, income classification and available MAT credit.
