Section 115BAB

Section 115BAB of the Income-tax Act allows new domestic manufacturing companies incorporated on or after 1 October 2019 to pay tax at a concessional rate of 15% plus surcharge and cess on income from manufacturing and ancillary activities, by filing Form 10-ID before the due date of the first return of income. The company must use predominantly new plant and machinery and forgo specified deductions like Section 10AA and additional depreciation. The option, once exercised, is irrevocable and applies through FY 2026-27.

Mayank Wadhera

Published: 18 Aug 2022

Updated: 16 May 2026

3 min read

Section 115BAB of the Income-tax Act is one of the most attractive direct-tax incentives ever offered to Indian manufacturers, originally introduced via the Taxation Laws (Amendment) Act, 2019. With the Union Budget 2026 reaffirming the government's Make in India and PLI ambitions, the 15% concessional tax regime for new domestic manufacturing companies remains a critical decision point for investors evaluating greenfield projects in FY 2026-27.

What Section 115BAB Offers

A new domestic manufacturing company can elect to pay tax at 15% (plus 10% surcharge and 4% cess, making the effective rate approximately 17.16%) on its income from manufacturing and ancillary activities, subject to specified conditions. The election is exercised by filing Form 10-ID on or before the due date of filing the return of income for the first assessment year. Once chosen, the option is irrevocable for all subsequent years.

Eligibility Conditions

The company must be incorporated and registered in India on or after 1 October 2019 and must commence manufacturing on or before the cut-off date specified by the Government, extended periodically through Finance Acts.
The company must be engaged in the manufacture or production of any article or thing, and research or distribution of articles manufactured by it.
The company should not have been formed by splitting up or reconstruction of an existing business.
Plant and machinery used must be new — limited use of second-hand machinery up to 20% is permitted.
The company must not avail specified deductions such as Section 10AA, additional depreciation, investment allowance and certain Chapter VI-A deductions.

Activities Treated as Manufacturing

Manufacturing includes production of articles or things, and ancillary activities such as research and distribution of articles manufactured by the company itself. CBDT has clarified through circulars that activities like development of computer software, mining, conversion of marble blocks into slabs, bottling of gas and printing of books or magazines are not considered manufacturing for Section 115BAB.

Tax on Non-Manufacturing Income

Income from activities other than manufacturing earned by a Section 115BAB company is taxable at 22% plus surcharge and cess.
Short-term capital gains on assets that are not part of the manufacturing block of assets are taxed at 22%.
Specified domestic transactions with related parties can be re-priced by the Assessing Officer under Section 115BAB(6) read with the transfer pricing provisions.
Income from royalty, FTS or other passive sources continues to follow normal slab rules subject to the 22% cap.

MAT and Other Comparisons

Companies opting for Section 115BAB are not subject to Minimum Alternate Tax under Section 115JB and are not eligible to carry forward MAT credit. Compared with Section 115BAA (22% concessional rate for all domestic companies), Section 115BAB offers a lower headline rate but is conditional on manufacturing and timeline conditions. Compared with the normal regime, the trade-off is between concessional rate and forgoing specified deductions.

Decision Framework for FY 2026-27

Greenfield manufacturing units with limited reliance on Section 10AA or area-based incentives are natural candidates.
Projects where commencement timeline can realistically be met under the extended Government notification should evaluate the regime.
Companies with significant captive R&D or distribution related to their own manufactured goods can comfortably stay within Section 115BAB.
Companies with diversified portfolios should model both Section 115BAA and Section 115BAB outcomes before electing.

Compliance Requirements

Once the option is exercised, the company must continue to satisfy all conditions in every year. Form 10-ID must be filed electronically with a valid Digital Signature Certificate. Detailed records of new plant and machinery, related party transactions and segment-wise income are essential. Tax audit under Section 44AB and transfer pricing report under Section 92E remain applicable.

Conclusion

Section 115BAB continues to be one of the most powerful direct-tax incentives for new manufacturing in India in FY 2026-27. The 15% rate is compelling, but the eligibility conditions, timeline restrictions and irrevocability demand careful planning. Model your project economics with and without the regime, document compliance from inception, and engage tax counsel before exercising the irrevocable Form 10-ID option.

Frequently Asked Questions

Who can opt for Section 115BAB?

Any domestic company incorporated on or after 1 October 2019, engaged in manufacturing or production of articles or things, that commences manufacturing within the Government-notified timeline, uses substantially new plant and machinery, and is not formed by splitting up an existing business, can opt for Section 115BAB by filing Form 10-ID.

What is the effective tax rate under Section 115BAB?

The base rate is 15% plus a flat 10% surcharge and 4% health and education cess, making the effective tax rate approximately 17.16% on manufacturing and ancillary income. Non-manufacturing income earned by the same company is taxed at 22% plus surcharge and cess.

Is MAT applicable to a company under Section 115BAB?

No. A company opting for Section 115BAB is exempt from Minimum Alternate Tax under Section 115JB and cannot claim brought-forward MAT credit. This is a significant simplification for new manufacturing setups but should be modelled along with the loss of specified deductions.

Can a company switch from Section 115BAB to another regime later?

No. Once a company exercises the option under Section 115BAB by filing Form 10-ID, the choice is irrevocable for all subsequent years. The company must continue to meet all eligibility conditions; if any condition is violated, the benefit is withdrawn and normal corporate tax applies.