Section 204 of the Income-tax Act, 2025 — 15% Concessional Tax for New Manufacturing Co-operative Societies

In plain language

What Section 204 is all about

Section 204 of the Income-tax Act, 2025 gives a flat 15% concessional income-tax rate to certain new manufacturing co-operative societies resident in India. It carries forward, almost word for word, the benefit that Section 115BAE of the old Income-tax Act, 1961 gave (introduced by the Finance Act, 2023). The idea is simple: co-operative societies were historically taxed at slab rates going up to 30%, while new manufacturing companies enjoyed a 15% rate. Section 204 puts new manufacturing co-operatives on the same footing as new manufacturing companies, so that the co-operative sector — sugar mills, dairy processors, agro-processing units, spinning mills and similar member-owned businesses — is not penalised merely for choosing the co-operative form.

Who can opt for Section 204

• Resident co-operative society: the society must be resident in India.
• New set-up: it must have been set up and registered on or after 1 April 2023.
• Manufacturing commenced in time: it must have commenced manufacturing or production of an article or thing on or before 31 March 2024. Because this window has closed, no fresh society can now become eligible — the section today mainly governs societies that already qualified and continue in the regime.
• Conditions of Section 205 satisfied: the society must fulfil the common conditions in Section 205(2) — broadly, it must not be formed by splitting up or reconstructing an existing business, must not use previously used (second-hand) plant and machinery beyond a small tolerance of 20% of total machinery value (imported machinery never used in India is treated as new), and must not carry on any business other than manufacturing or production of an article or thing and research in relation to, or distribution of, that article.

The rate structure — not everything is 15%

Section 204(1) contains a table with four different rates depending on the character of the income:

• 15% on income derived from or incidental to manufacturing or production (the core benefit).
• 22% on income that is not derived from or incidental to manufacturing (for example, interest on surplus funds), and no deduction for any expenditure or allowance is permitted against such income.
• 22% on short-term capital gains from transfer of capital assets on which no depreciation is allowable.
• 30% on "excess profits" deemed under Section 205(4) — where the Assessing Officer finds that, owing to a close connection with another person, the business produces more than ordinary profits, the excess is taxed at 30%.

On top of these rates, a 10% surcharge and 4% health and education cess apply, so the effective rate on manufacturing income works out to about 17.16%.

The price of the concession — what you must give up

• No incentive deductions: total income is computed without the deductions listed in Section 205(1) (SEZ-type and investment-linked incentives, additional depreciation, etc.) and without Chapter VIII deductions except Section 146 (the deduction for additional employee cost, the successor to Section 80JJAA of the 1961 Act).
• No brought-forward losses linked to those deductions: set-off of carried-forward losses or unabsorbed depreciation attributable to the excluded deductions is not allowed, and such losses are treated as having lapsed.
• One-way door: the option must be exercised in the prescribed manner on or before the due date under Section 263(1) for filing the first return of income. Once exercised, it applies to all subsequent tax years and cannot be withdrawn. If any condition is violated in a later year, the option becomes invalid for that year and all following years, and the society falls back to the normal provisions.

How Section 204 fits with neighbouring provisions

• Section 205 houses the common eligibility conditions and the anti-abuse "excess profits" rule for all the concessional regimes (companies and co-operatives).
• Section 203 is the softer alternative — an existing (older) resident co-operative society that cannot meet the "new manufacturing" tests can still opt for a 22% rate (successor to Section 115BAD).
• Section 201 is the mirror provision for new manufacturing domestic companies at 15% (successor to Section 115BAB).
• Alternate Minimum Tax (AMT) does not apply to a society that has validly opted for Section 204 — consistent with the position under the 1961 Act where Section 115JC was switched off for 115BAE optants.

Practical implications

• Societies that opted under Section 115BAE of the 1961 Act transition seamlessly into Section 204 from tax year 2026-27 (the 2025 Act is effective from 1 April 2026).
• Keep manufacturing and non-manufacturing income streams clearly segregated in the books, because they attract different rates and the 22% bucket gets no expense deductions.
• Transactions with connected persons (member-suppliers, sister societies) should be at arm's length — otherwise the 30% deemed-income rate under Section 205(4) can bite, and specified domestic transaction transfer-pricing rules apply.
• Before opting, model the numbers: a society with large accumulated losses or heavy incentive deductions may temporarily be better off under normal rates, but remember the option deadline is tied to the first return.