Section 205 of the Income-tax Act, 2025 — Conditions for Concessional Tax on Companies and Co-operative Societies

In plain language

Section 205 of the Income-tax Act, 2025 (effective from 1 April 2026, i.e. tax year 2026-27 onwards) is the "rule book" that every company or co-operative society must follow if it wants to pay income tax at the special concessional rates of 25%, 22% or 15%. The concessional rates themselves are given in sections 199 to 204 of the new Act; Section 205 lists the conditions attached to those rates — which deductions you must give up, what a "new manufacturing" entity must look like, and how the tax department can counter profit-shifting.

Where Section 205 comes from — the 1961 Act link

Under the old Income-tax Act, 1961, each concessional regime carried its own conditions inside the section itself — section 115BA (25% for certain manufacturing companies), section 115BAA (22% for domestic companies), section 115BAB (15% for new manufacturing companies), section 115BAD (22% for resident co-operative societies) and section 115BAE (15% for new manufacturing co-operative societies). The 2025 Act keeps the rates in separate sections (199, 200, 201, 203 and 204 respectively) but pulls the common conditions into one place — Section 205. Nothing substantive has changed in the policy; the drafting is simply cleaner.

Who Section 205 applies to

• Section 199 — certain domestic manufacturing companies taxed at 25% (old 115BA);
• Section 200 — any domestic company opting for the 22% rate (old 115BAA);
• Section 201 — new domestic manufacturing companies taxed at 15% (old 115BAB);
• Section 203 — resident co-operative societies opting for 22% (old 115BAD);
• Section 204 — new manufacturing co-operative societies taxed at 15% (old 115BAE).

It does not apply to individuals or HUFs under the default new personal tax regime (section 202 of the 2025 Act, old 115BAC) — that regime has its own conditions.

Condition 1 — Deductions and exemptions you must give up (Section 205(1))

To enjoy the low flat rate, total income must be computed without the following incentives of the 2025 Act:

• Section 33(8) — additional depreciation on new plant and machinery (old section 32(1)(iia));
• Section 45(3)(a)/(b)/(c) — weighted/specific deductions for scientific research contributions (old section 35 sub-clauses);
• Section 46 — investment-linked deduction for capital expenditure of specified businesses (old section 35AD);
• Section 47(1)(a) — expenditure on agricultural extension projects (old section 35CCC);
• Section 48 — tea, coffee and rubber development account deposits (old section 33AB);
• Section 49 — site restoration fund for petroleum/natural gas business (old section 33ABA);
• Section 144 — profit-linked deduction for SEZ units (old section 10AA).

The parent rate-sections additionally bar most Chapter VIII deductions (the old Chapter VI-A), keeping only limited exceptions such as the deduction for new employee cost (old 80JJAA) and inter-corporate dividends (old 80M). Losses and unabsorbed depreciation attributable to these denied incentives cannot be set off and are treated as already given effect to — so timing matters when you opt in.

Condition 2 — Tests for "new manufacturing" entities under sections 201 and 204 (Section 205(2))

• No splitting-up or reconstruction: the business must not be formed by splitting up or reconstructing an existing business (revival of a discontinued business under section 140(4) is the only carve-out);
• Mostly new machinery: previously used plant and machinery must not exceed 20% of the total value of plant and machinery. Imported second-hand machinery that was never used in India and on which no depreciation was ever claimed in India counts as "new";
• No recycled hotel/convention buildings: a building earlier used as a hotel or convention centre for which the old section 80-ID deduction was claimed cannot be used;
• Manufacturing only: the entity must engage only in manufacture or production of an article or thing, plus research on and distribution of that article.

What counts as manufacturing? Generation of electricity is included, but software development, mining, converting marble blocks into slabs, bottling gas into cylinders, printing of books and production of cinematograph films are expressly excluded, along with any other business the Central Government notifies.

Condition 3 — Anti-abuse rule for related-party profits

If the 15% entity does business with closely connected persons and the arrangement produces more than ordinary profits in the low-tax entity, the Assessing Officer can recompute profits on a reasonable/arm's-length basis (specified domestic transactions follow the transfer-pricing rules). The excess profit so identified is taxed at the higher 30% rate, not 15%. This stops groups from parking profits in a new 15% company.

Practical implications

• Opting into a concessional regime is largely a one-way street — model the value of foregone incentives (SEZ, 35AD-type, additional depreciation) against the rate saving before opting;
• The effective rates after 10% surcharge and 4% cess are 25.17% (22% regimes) and 17.16% (15% regimes), with no MAT/AMT exposure for companies under section 200/201;
• Structure new plants carefully — the 20% used-machinery cap and the splitting-up test are the most common reasons the 15% rate is denied;
• Keep related-party pricing defensible; the CBDT can issue clarificatory guidelines (laid before Parliament) where genuine difficulties arise in meeting the conditions.