Section 115BAB

Section 115BAB: The 15% Tax Rate for New Domestic Manufacturing Companies — A Complete Guide for FY 2026-27

Section 115BAB of the Income-tax Act, 1961 gives a new domestic manufacturing company the option to pay income tax at 15% — an effective rate of approximately 17.16% after surcharge and cess — provided the company was incorporated on or after 1 October 2019 and commenced manufacturing on or before the government-notified cut-off date. The election is made by filing Form 10-ID before the return-filing due date for the first applicable assessment year and is irrevocable. Companies electing this route are fully exempt from Minimum Alternate Tax (MAT) under Section 115JB and must forgo several deductions including Section 10AA, additional depreciation, and most Chapter VI-A incentives.

What Section 115BAB Actually Gives You — And What You Give Up

The headline number — 15% — has attracted serious attention since this provision was introduced by the Taxation Laws (Amendment) Act, 2019. The correct commercial question, however, is not "15% versus 30%"; it is the net benefit after forgoing deductions, weighed against the effective rate reduction.

Effective tax rate under Section 115BAB:

• Base rate: 15%
• Surcharge (capped at 10% regardless of income level, unlike the normal regime): 1.5%
• Post-surcharge rate: 16.5%
• Health and Education Cess at 4%: 0.66%
• Effective rate: 17.16%

This compares with approximately 25.17% under Section 115BAA (22% base + 10% surcharge + 4% cess) for eligible domestic companies. The roughly 8-percentage-point gap in effective rate is the core commercial argument for Section 115BAB.

What you give up in exchange:

• Section 10AA deduction (available to SEZ units)
• Additional depreciation under Section 32(1)(iia)
• Investment allowance under Sections 32AC and 32AD
• Chapter VI-A deductions including Sections 80IC, 80IE and related area-based incentives
• MAT credit brought forward from any pre-election period — it becomes permanently unusable once you opt in
• Carry-forward losses that arose entirely from the above foregone deductions

If your project relies heavily on any of these — particularly a valid SEZ licence under Section 10AA or area-based incentives for a hill-state or north-east facility — the 115BAB route demands a careful income model before you exercise the irrevocable option.

Who Qualifies: The Five Eligibility Conditions You Cannot Afford to Miss

All five conditions must be satisfied simultaneously in every assessment year in which you claim the regime. Failing even one condition in a single year disqualifies you for that year and can trigger reassessment for prior years.

1. Incorporation date on or after 1 October 2019 The company must be incorporated and registered in India from 1 October 2019 onwards. A company formed by splitting up or reconstruction of an existing business does not qualify — even if the resulting entity carries a fresh CIN issued after that date. The Assessing Officer looks through the corporate form to the economic substance.

2. Commencement of manufacturing on or before the notified cut-off date The original cut-off was 31 March 2023, extended through successive Finance Acts. For FY 2026-27 / AY 2027-28, verify the current notified cut-off directly against the latest CBDT notification published on the Income Tax portal (www.incometax.gov.in). Finance Act 2025 and Finance Act 2026 may carry further amendments. Do not rely on secondary commentary for this date — an incorrect cut-off assumption is an irreversible filing error.

3. Business must be manufacture or production of any article or thing Distribution-only arms, pure trading entities and software development companies are excluded. The company must be the actual producer of a tangible article. Ancillary activities — in-house research related to goods you manufacture, and distribution of articles you yourself produced — are permitted within the manufacturing income ring.

4. Plant and machinery must be predominantly new Not more than 20% of the total installed cost of plant and machinery (P&M) can be second-hand. "Second-hand" means previously used anywhere — in India or abroad. There is no carve-out for "lightly used" or "refurbished." The 20% ceiling is computed on the aggregate installed P&M cost, not on year-by-year additions alone (see the worked example in the next section).

5. No claimed excluded deductions in any prior year If the company has already claimed Section 10AA, additional depreciation, or Chapter VI-A area incentives in any earlier assessment year, it cannot shift into the 115BAB regime from a later year. The eligibility gate applies from the company's first year of operations.

Activities That Count — and Those That Do Not — as Manufacturing

CBDT has issued clarificatory circulars that draw the boundary explicitly.

Counted as manufacturing:

• Production of goods through physical or chemical transformation of raw materials
• In-house R&D directly related to articles the company itself manufactures
• Distribution of finished goods produced by the company

Not counted as manufacturing (CBDT-clarified):

• Development of computer software
• Mining
• Conversion of marble blocks into polished slabs
• Bottling of gas into cylinders
• Printing of books, journals or magazines
• Generation of electricity (covered under separate incentive provisions)

The list is not exhaustive. If your process falls in a grey area — say, CNC precision machining that involves significant embedded software programming — document the manufacturing-versus-services revenue split at plant level from Day 1. The Assessing Officer will examine activity codes, GST HSN/SAC classification, and job-card records if the question arises at scrutiny.

The 20% Second-Hand Machinery Rule: Where Companies Most Often Slip Up

This is the condition that triggers the largest proportion of post-setup compliance failures. The calculation is straightforward, but companies frequently miss that it is a cumulative and dynamic test.

Illustrative calculation — Year 1:

Second-hand component = Rs. 60,00,000 20% of Rs. 5,00,00,000 = Rs. 1,00,00,000 Rs. 60,00,000 < Rs. 1,00,00,000 → Compliant in Year 1

What goes wrong in Year 2:

Company acquires an additional second-hand lathe for Rs. 60,00,000 (sourced from a closing plant).

New total P&M = Rs. 5,60,00,000 New cumulative second-hand total = Rs. 1,20,00,000 20% of Rs. 5,60,00,000 = Rs. 1,12,00,000 Rs. 1,20,00,000 > Rs. 1,12,00,000 → Threshold breached

Result: the company loses its Section 115BAB eligibility from Year 2 onwards. The irrevocable election already filed via Form 10-ID does not protect you if the eligibility conditions are subsequently violated — the regime simply ceases to apply.

The fix: Embed a second-hand P&M running-percentage check into your capital expenditure approval workflow. Before any capex is sanctioned, finance must compute the revised second-hand ratio including the proposed addition. Never treat this as a post-purchase audit.

Taxation of Non-Manufacturing Income Inside a Section 115BAB Company

Electing Section 115BAB does not mean all income is taxed at 15%. The Act applies a bifurcated treatment — only manufacturing income qualifies for the concessional rate.

Transfer pricing exposure: Section 115BAB(6) applies transfer pricing provisions to specified domestic transactions with related parties. If your company supplies manufactured goods to a related Indian trading affiliate at below-market prices, the Assessing Officer can re-price those transactions to the arm's-length standard under Chapter X. This is a live risk in group structures where the 115BAB entity serves as a captive manufacturer.

Form 10-ID: How to Exercise the Option — Step by Step

The election to opt into Section 115BAB is made by filing Form 10-ID electronically on the Income Tax e-filing portal. Verbal election, board resolution, or mention in the ITR alone is insufficient. Missing the Form 10-ID deadline is treated as a non-election — the option simply does not apply for that year.

1. Confirm eligibility before the first return filing. Verify incorporation date, commencement date, P&M composition, and absence of any prior excluded-deduction claims.
2. Log in to the IT portal (www.incometax.gov.in) using the company's PAN-linked credentials.
3. Navigate to: e-File → Income Tax Forms → File Income Tax Forms → Form 10-ID.
4. Enter: company PAN, date of incorporation, date of commencement of manufacturing, description of manufacturing activity (align with GST HSN codes for consistency).
5. Attach a valid Digital Signature Certificate (DSC) registered in the name of the authorised signatory — typically the Managing Director or a Director authorised by a board resolution.
6. Submit on or before the due date for filing the return of income for the first assessment year in which you want the option to apply. For AY 2027-28, the return due date for companies subject to tax audit under Section 44AB is typically 31 October 2026.
7. Download and preserve the acknowledgement with the system-generated filing reference number. This is your permanent irrevocable election record.
8. The option cannot be withdrawn after filing. There is no mechanism in the Act to reverse a Form 10-ID election. If your circumstances change — a new SEZ licence, a lucrative Chapter VI-A project — you remain locked in. This is why financial modelling must precede filing, not follow it.

Section 115BAB vs Section 115BAA vs Normal Regime: A Numbers-First Comparison

Worked Example: AY 2027-28 Tax Calculation for a Rs. 10 Crore Manufacturing Company

ScenarioCo Pvt Ltd — incorporated 1 March 2021; commenced manufacturing 1 November 2023; all income for FY 2026-27 is from manufacturing.

Option A — Section 115BAB:

• Taxable income: Rs. 10,00,00,000
• Tax at 15%: Rs. 1,50,00,000
• Surcharge at 10%: Rs. 15,00,000
• Sub-total: Rs. 1,65,00,000
• Health and Education Cess at 4%: Rs. 6,60,000
• Total tax: Rs. 1,71,60,000

Option B — Section 115BAA:

• Tax at 22%: Rs. 2,20,00,000
• Surcharge at 10%: Rs. 22,00,000
• Sub-total: Rs. 2,42,00,000
• Cess at 4%: Rs. 9,68,000
• Total tax: Rs. 2,51,68,000

Option C — Normal Regime (25% rate; Rs. 10 crore income attracts 7% surcharge):

• Tax at 25%: Rs. 2,50,00,000
• Surcharge at 7%: Rs. 17,50,000
• Sub-total: Rs. 2,67,50,000
• Cess at 4%: Rs. 10,70,000
• Total tax: Rs. 2,78,20,000

Annual saving under 115BAB vs 115BAA: Rs. 80,08,000 (approximately Rs. 80 lakh) Annual saving under 115BAB vs normal regime: Rs. 1,06,60,000 (approximately Rs. 1.07 crore)

Over a ten-year horizon at the same income level, the differential against 115BAA alone is approximately Rs. 8 crore in retained earnings. That is a material input for any greenfield capex decision.

Now add a complication: ScenarioCo also earns Rs. 1 crore in FD interest in FY 2026-27.

Under Section 115BAB, this Rs. 1 crore of interest income is taxed at 22% + 10% surcharge + 4% cess:

• Tax: Rs. 22,00,000 + Rs. 2,20,000 surcharge = Rs. 24,20,000
• Cess at 4%: Rs. 96,800
• Interest income tax: Rs. 25,16,800

Under Section 115BAA, the entire Rs. 11 crore blended income is at 22% — so the interest tranche attracts exactly the same tax. For the interest income portion, 115BAB provides zero rate advantage. The 15% benefit is exclusively for the manufacturing income ring.

Common Mistakes and Pitfalls to Avoid

1. Filing Form 10-ID after the return due date. The election window closes with the ITR filing deadline. A Form 10-ID filed in January 2027 after a belated AY 2027-28 return is not a valid election. Because the first-year opportunity is missed, you may lose the regime permanently depending on how the statutory timeline is interpreted. File on time.

2. Acquiring second-hand P&M without a pre-sanction ratio check. As demonstrated above, a single additional second-hand acquisition can silently breach the 20% ceiling. This must be computed before every capital expenditure sanction — not discovered during the statutory audit six months later.

3. Assuming a "reconstructed" company will pass muster. Splitting a partnership firm or converting a proprietorship into a private limited company after October 2019 to claim an inception date within the eligibility window is a known risk area. The Assessing Officer examines continuity of assets, customers, employees and management. Restructuring-driven eligibility arguments require robust documentation and typically a prior legal opinion.

4. Treating distribution of third-party goods as an ancillary manufacturing activity. Only distribution of articles the company itself manufactured is treated as manufacturing income. Revenue from distributing goods sourced from sister concerns or unrelated suppliers is taxed at 22%. Many promoters create integrated group structures without cleanly separating these revenue streams — which leads to both a higher blended tax rate and a transfer-pricing risk.

5. Not building segment-wise P&L from Day 1. Without clean, contemporaneous accounting that separates manufacturing and non-manufacturing income, quantifying the 15% eligible tranche at assessment becomes a negotiation rather than a calculation. Configure your ERP or accounting system to capture activity codes at the transaction level from the date of commencement.

6. Exercising the option without modelling the Section 10AA trade-off. For a facility within an SEZ, Section 10AA provides a 100% profit deduction for the first five years and 50% for the next five years. For a high-margin manufacturing unit, Section 10AA can outperform the 17.16% effective rate. Run a five-year net-present-value comparison — including the deduction phase-out — before filing Form 10-ID and permanently surrendering Section 10AA.

7. Expecting to use pre-election MAT credit post-election. Once you opt for Section 115BAB, MAT credit accrued in years before the election is frozen. It cannot offset future tax liabilities under the concessional regime. Factor this into your Year 1 transition cash flow.

Decision Framework: Is Section 115BAB Right for Your FY 2026-27 Project?

Work through these four questions before you file Form 10-ID for AY 2027-28.

Q1: Is your commencement date inside the current notified cut-off? Pull the latest CBDT notification. If your manufacturing commenced after the current cut-off and no extension has been issued covering your date, the eligibility question is settled — you cannot use 115BAB. Verify this first.

Q2: What percentage of your total revenue will come from manufacturing versus other streams? If 30–40% or more of projected revenue is non-manufacturing (trading, interest, royalties, distribution of third-party goods), the effective blended rate advantage narrows substantially. Model the split explicitly at projected revenue volumes, not just theoretically.

Q3: Do you have Section 10AA or Chapter VI-A entitlements that generate measurable tax savings? Build a five-year P&L model under (a) 115BAB forgoing deductions, and (b) normal regime or 115BAA retaining deductions. Identify the crossover year where the rate differential cumulatively exceeds the value of foregone deductions. The answer drives your election decision.

Q4: Is your second-hand P&M exposure controllable over the project life? If the nature of your industry — specialised tooling, niche capital equipment, inherited machinery from a related foreign entity — means second-hand P&M may eventually exceed 20%, Section 115BAB carries an ongoing eligibility risk. In that scenario, Section 115BAA at a stable 25.17% effective rate may be the more defensible choice.

Strong 115BAB candidates: Greenfield electronics, semiconductors, specialty chemicals, medical devices, defence components — primarily manufacturing for domestic sale or export, predominantly new P&M, no legacy deduction claims, no SEZ footprint.

Borderline cases: Companies with partial SEZ operations, hill-state area incentives, or significant captive R&D that may straddle the manufacturing and services definitions. These require a formal tax opinion and income modelling before election.

Avoid Section 115BAB if: Your primary revenue is from software development, mining, gas bottling, marble slab cutting, or printing. CBDT has specifically excluded these — the 15% rate does not apply to your core income stream, and electing 115BAB only results in forgoing deductions without the corresponding rate benefit.

Key Takeaways

• Section 115BAB delivers an effective rate of ~17.16% — roughly 8 percentage points lower than Section 115BAA's ~25.17%. On Rs. 10 crore of manufacturing profit in AY 2027-28, that translates to approximately Rs. 80 lakh in annual tax savings, or Rs. 8 crore over ten years.
• Five eligibility conditions must all be met every year: post-October 2019 incorporation; manufacturing commencement within the current notified cut-off; genuine manufacture or production of a tangible article or thing; second-hand P&M not exceeding 20% of total installed P&M cost; and no prior claim of excluded deductions.
• The 20% second-hand P&M ceiling is cumulative and dynamic. It is not a one-time test at the time of setting up — it recalculates with every capital addition. Integrate the check into your capex approval workflow.
• Only manufacturing income attracts the 15% rate. FD interest, rental, trading income, and capital gains on non-manufacturing assets are all taxed at 22% base — the same as Section 115BAA. Model your non-manufacturing revenue share before election.
• Form 10-ID must be filed electronically with a valid DSC on or before the ITR due date for the first relevant assessment year — for AY 2027-28, typically 31 October 2026 for companies subject to tax audit under Section 44AB. There is no curative window for a missed Form 10-ID.
• The election is irrevocable. There is no statutory mechanism to withdraw Form 10-ID after filing. If your project economics shift — a new SEZ licence, an area-incentive entitlement, a change in product mix — you remain permanently bound by the election made.
• Verify the current commencement cut-off date from the latest CBDT notification before any decision. The cut-off has been extended multiple times through successive Finance Acts and is the single most time-sensitive eligibility variable for projects evaluating this regime in FY 2026-27.

This article reflects the provisions of the Income-tax Act, 1961 as amended through Finance Act 2024, and general guidance applicable for FY 2026-27 / AY 2027-28. Investors should verify the current manufacturing commencement cut-off date under Section 115BAB directly from the latest CBDT notifications before making any irrevocable filing under Form 10-ID.