Corporate Tax for a Private Limited Company: FY 2025-26 and Tax Year 2026-27

India changed its income tax law on 1 April 2026. The Income-tax Act, 2025 replaced the Income-tax Act, 1961, which may seem complex but underscores the importance of staying updated. What did not change is the money. A private limited company earning ₹20 lakh pays almost the same tax in both years. This guide covers both years side by side: what the company pays, what a promoter-director pays on salary, what a shareholder pays on dividend, and what a foreign parent gets after withholding.

Which Law Applies When?

This is the question to settle before any other, because getting it wrong means quoting the right rate under the wrong Act. The dividing line is the date income is earned, not the date the return is filed.

The CBDT has confirmed this directly in its published FAQs on the transition: income of FY 2025-26 remains under the 1961 Act and is assessed in AY 2026-27, while income from 1 April 2026 falls under the 2025 Act as Tax Year 2026-27. There is no gap year and no overlap.

Two consequences follow, and both catch people out. First, a return filed in September 2026 for FY 2025-26 income is still an old-Act return, using old section numbers and old forms, even though it is being filed months after the new Act commenced. The filing date is irrelevant. Second, Section 536 of the Income-tax Act, 2025, the repeal and savings clause, keeps the 1961 Act alive for everything relating to periods up to 31 March 2026, including assessments, appeals and penalty proceedings started after 1 April 2026.

Who Is a Domestic Company?

Every rate below applies to a “domestic company,” and the definition is broader than founders expect. It covers any company incorporated in India, including a wholly owned Indian subsidiary of a US, UK, Singapore or Japanese parent. Nationality of ownership is irrelevant; place of incorporation is what counts.

A foreign company operating in India through a branch or project office is a different taxpayer entirely and is taxed at higher rates. Clarifying this distinction helps you make informed structuring decisions: an Indian subsidiary pays the domestic rates in this guide, a branch does not.

Corporate Tax Rates: Both Years

Here is the whole rate card for both years in one place. The striking feature is how little moved: the rates, surcharge bands and cess are identical across the changeover. What changed is where the law sits.

Surcharge and cess, again identical in both years

Marginal relief applies where income only just crosses a surcharge threshold, so a company earning slightly above ₹1 crore never pays more tax than the extra income it earned.

The Default 25% Rate

Unless a company actively elects into the concessional regime, this is what applies. No form is filed, and no election is made. The dividing line is turnover in a look-back year, and that look-back year shifts as the years roll forward.

That last row matters for any recently incorporated company. A company set up in 2026 had no existence in Tax Year 2024-25 and therefore no turnover to test. Nil does not exceed ₹400 crore, so the company sits in the 25% band. This is the settled reading of the threshold rather than a separately notified rule, and it is how the test has always been applied to first-year companies. 

Illustration

The 22% Concessional Rate

The flat 22% regime, Section 115BAA in FY 2025-26 and Section 200 (The Income Tax Act 2025) from Tax Year 2026-27, is open to any domestic company, whatever its age or incorporation date. The trade is a lower headline rate in exchange for permanently surrendering a defined list of deductions.

The flat surcharge is the detail most often missed. It applies at 10% whether the company earns ₹20 lakh or ₹20 crore, whereas the default regime charges no surcharge at all below ₹1 crore. That is why the gap between the two regimes is narrow at small profits and widens as the company grows. On the same example of ₹20,00,000 profit, in either year, here is a tabular calculation

Deductions given up include the SEZ deduction, additional depreciation, Section 35AD investment-linked deductions, and most Chapter VI-A claims other than the employment-generation and inter-corporate dividend deductions.

MAT does not apply in the concessional regime of 22%

The MAT Provisions do not apply to a domestic company that opts for the 22% rate, so for FY 2025-26 the company pays 22% plus 10% surcharge and 4% cess, an effective 25.168%, and book profit is never tested. From tax year 2026-27, Sec. 206(1)(q)(ii), Income-tax Act, 2025 keeps a person who has opted under Sec. 200 (5) outside the minimum alternate tax charged by Sec. 206(1).

Accumulated MAT credit under Sec. 115JAA lapses the moment the option is exercised, as CBDT clarified in Circular No. 29/2019 dated 2 October 2019. And the exclusion attaches to the option, not to the rate paid: let the conditions fail, and the option turns invalid for that year and every year after it, under the proviso to Sec. 115BAA(1) or Sec. 200(2) of the 2025 Act. MAT then runs on book profit again, at 15% for FY 2025-26 and 14% from tax year 2026-27 under Sec. 206(1)(b)(ii), and after the Finance Act, 2026, it is a final tax that throws up no credit to carry forward.

⚠️ Why 15% Rate for Manufacturing Is Closed

The 15% rate for new manufacturing companies still sits in the statute, as Section 115BAB in the old Act and Section 201 in the new one. It is quoted constantly on comparison pages and in pitch decks aimed at inbound investors. For any company being incorporated now, it is not available, and the reason is a date that has already passed.

A company cannot start manufacturing before it exists. The 31 March 2024 deadline was not extended by the Finance Act 2025, was not reopened when the Income-tax Act, 2025 carried the provision across, and was not touched by the Finance Act 2026. The section survives only to protect companies that already qualified before the cut-off. Only a fresh amendment could reopen it, and none has been made.

Choosing Your Tax Regime

With the manufacturing track closed, the live decision is between the default rate and an irrevocable election into 22%. At ₹20,00,000 profit, the difference is small; the commitment is not.

The election saves ₹16,640 here, against a decision that cannot be undone. A company with genuine deductions to claim, a plant attracting additional depreciation, an SEZ unit, or a profit-linked start-up deduction if it separately qualifies, will usually do better staying on the default track.

How Directors Are Paid

For most private limited companies, the promoters are also the directors, and how they are paid changes the tax outcome more than the choice of corporate regime does. Indian law treats two categories of director payment quite differently, and the split runs through income tax, GST and company law at once.

Important Note on Director Payment

1. GST depends on employment status. Under CBIC Circular 140/10/2020-GST, salary paid to a whole-time or managing director as an employee remains outside GST. Conversely, sitting fees or commissions paid to non-executive or independent directors incur 18% GST under reverse charge, payable by the company.
2. Private companies are exempt from remuneration caps. The 11% net profit ceiling under Section 197 of the Companies Act, 2013 governs only public companies. Private limited companies can determine remuneration freely via their Articles and board decisions. However, excessive payments relative to actual services may be disallowed under related-party tax provisions.
3. Salary vs. Dividend. Salary is tax-deductible for the company and taxed once. Dividends are distributed from post-tax profits, resulting in double taxation—at both the corporate and shareholder levels.

Salary or Dividend?

This is the question every promoter-director eventually asks, and the numbers answer it clearly. Salary is deductible by the company, so it is taxed once. Dividend is paid from post-tax profit, so it is taxed twice: once as corporate tax, again in the shareholder’s hands. Take a company with ₹20,00,000 of profit before any payment to the founder, who has no other income and is taxed under the default personal regime.

The salary route leaves ₹4,33,680 more with the founder on identical company profit. The gap comes from three things at once: the salary is deductible so corporate tax disappears, salary attracts the ₹75,000 standard deduction while dividend does not, and dividend suffers both layers of tax while salary suffers one.

Where an expatriate sits on the board of the Indian subsidiary and draws remuneration from it, that remuneration is taxable in India. It attracts withholding in the normal way, whatever the individual’s residential status.

Three cautions before treating this as a strategy. Remuneration must be commensurate with services actually rendered, properly authorised by the Articles and the board, and documented, or the deduction can be challenged. Salary brings payroll obligations that dividend does not, including provident fund and professional tax where applicable. And the comparison only works for a founder who genuinely works in the business. Most companies land on a mix: salary sized to the founder’s actual role, with surplus profit distributed as dividend. A shareholder who is not a director cannot be paid a salary at all. For them, and for any foreign parent, dividend is the only route.

Dividend Distribution and TDS

Dividend is taxed in the recipient’s hands at their own applicable rate. There is no Dividend Distribution Tax; the old Section 115-O regime was abolished from 1 April 2020 and has not returned under the new Act. The old Section 115BBDA, which charged an extra 10% on dividends above ₹10 lakh for certain resident shareholders, has no successor either.

The ₹10,000 threshold applies to resident individual shareholders and was raised from ₹5,000 by the Finance Act 2025 with effect from 1 April 2025, so it governs FY 2025-26 as well as the current year. Material still quoting ₹5,000 is out of date. Where the shareholder has not furnished a PAN, TDS applies at the higher rate the Act prescribes for missing PAN.

TDS is not the final tax. It is a credit the shareholder sets against their own liability, so a shareholder in a low slab may recover part of it as a refund, while one in the 30% band will owe more when filing.

Deemed Dividend (A trap for promoters)

 Money taken out of a closely held company as a loan or advance to a shareholder holding 10% or more of the voting power, or to a concern in which such a shareholder has a substantial interest, can be treated as a deemed dividend and taxed in the shareholder’s hands even though no dividend was ever declared. Under the 1961 Act this sits in Section 2(22)(e). The concept carries into the new Act within its dividend definition. Founders who draw informally from the company current account, intending to square it up later, are the usual casualties.

For Foreign Holding Companies

A foreign parent cannot draw salary from its Indian subsidiary, so the salary route above is closed to it. Dividend is the principal way profit comes home, and the withholding rate is where most of the value is won or lost. The default tds/withholding tax rate is 20% plus applicable surcharge and 4% cess, under Section 195 for FY 2025-26 and Section 393(2) from Tax Year 2026-27. Most of India’s tax treaties set a materially lower rate on dividends, but the treaty rate is not automatic. The company must hold the right paperwork before it deducts, or the full domestic rate applies regardless of what the treaty allows.

Requirement to avail DTAA Rate

1. Tax Residency Certificate from the parent’s home revenue authority
2. Online filing of Form 10F
3. Beneficial ownership and no permanent establishment declaration
4. Lower deduction certificate, Section 197 or Section 395 (if applicable)

The applicable treaty rate depends on the specific treaty and often on how much of the Indian company the parent holds, so it must be read from the relevant agreement rather than assumed from a general figure. Build the paperwork before the first distribution, not after: once tax has been deducted at the full rate, recovering the difference means a refund claim rather than a clean deduction.

Transfer Pricing

When an Indian company transacts with its foreign parent or group (e.g., through loans or services), pricing must be at “arm’s length” equal to fair market rates. These rules move to Sections 161 to 173 in the new Act. 

Compliance is mandatory regardless of value. Any group transaction requires an annual audit report (Form 3CEB) by October 31. Documentation is essential, as penalties for missing records reach 2% of the transaction value. Routing profits as “service fees” instead of dividends doesn’t avoid tax; it just invites scrutiny. Authorities will verify that actual services were rendered before allowing these deductions.

🧮 The Complete Worked Example

Here is the full path, from revenue to what the shareholder actually keeps, for a company incorporated on 15 April 2026. Its first tax year runs from incorporation to 31 March 2027, a shortened first period the law still calls Tax Year 2026-27. The tax rate is not scaled down for a part year.

❓ Frequently Asked Questions

Conclusion

While the core corporate tax arithmetic remains unchanged, with a ₹20 lakh profit incurring a ₹5,20,000 tax and the 15% manufacturing rate remaining closed to new entrants—the transition to the new Act alters section references, forms, and terminology. Consequently, the critical decisions for businesses lie in strategic planning: choosing whether to make the irrevocable 22% election, optimising founder-director remuneration between salary and dividends to save lakhs, and securing treaty paperwork beforehand for inbound groups. Setindiabiz’s process experts are available to model these scenarios against your financials and ensure all elections and withholding documentation are accurately implemented from the start.

Author Bio

Editorial Team

Setindiabiz Editorial Team is a multidisciplinary collective of Chartered Accountants, Company Secretaries, and Advocates offering authoritative insights on India’s regulatory and business landscape. With decades of experience in compliance, taxation, and advisory, they empower entrepreneurs and enterprises to make informed decisions.