Section 199 of the Income Tax Act, 2025 provides a concessional income-tax rate of 25% for certain eligible domestic manufacturing companies, subject to specified conditions.
Text of Section 199 of the Income Tax Act, 2025
199. Tax on income of certain manufacturing
domestic companies.
(1) Irrespective of anything contained in this Act, but subject
to the provisions of Parts A, B, E and this Part (other than sections 200 and
201) of this Chapter, the income-tax payable in respect of the total income of
a person, being a domestic company, for any tax year, shall, at the option of
such person, be computed at the rate of 25% subject to the following
conditions: -
(a) the company has been set-up and
registered on or after the 1st March, 2016;
(b) the company is not engaged in any
business other than the business of manufacture or production of any article or
thing and research in relation to, or distribution of, such article or thing
manufactured or produced by it; and
(c) the total income of the company
has been computed, -
(i) without any deduction under -
(A) section 45(2) or 47(1)(b); or
(B) Chapter VIII-C, other than the
provisions of section 146; or
(C) sections specified in section 205(1)(a) to (g);
(ii) without set off of any loss
carried forward from any earlier tax year, if such loss is attributable to any
of the deductions referred to in sub-clause (i).
(2) The loss referred to in sub-section (1)(c)(ii) shall be deemed to have been
given full effect to and no further deduction for such loss shall be allowed
for any subsequent year.
(3) The provisions of this section shall not apply unless an
option is exercised by the person in the manner as may be prescribed on or
before the due date specified under section 263(1) for furnishing the first of the returns of income which such
person is required to furnish and such option once exercised, shall apply to
subsequent tax years.
(4) Once the option under sub-section (3) has been exercised for any tax year, it cannot be
subsequently withdrawn for the same or any other tax year, except where the
person exercises option under section 200.
[1] Concessional Rate of Tax for Certain Manufacturing Domestic Companies [Section 199(1)]
Section
199(1) provides that the income-tax payable in respect of the total income of a
person, being a domestic company, for any tax year, shall, at the option of such
person, be computed at the rate of 25% subject to the following conditions: -
(a) Condition 1 - Company has been set-up and
registered on or after 01.03.2016 [Section 199(1)(a)]
Section 199(1)(a) requires that the company has been
set-up and registered on or after the 01.03.2016. Both aspects are relevant.
EXAMPLE 1 : ELIGIBLE COMPANY
XYZ Ltd. :
§ set up : 01.04.2016
§ registered
: 15.04.2016
§ manufacturing
business
It satisfies the date condition.
EXAMPLE 2 : NOT ELIGIBLE
PQR Ltd.:
§ set up : 01.01.2016
§ registered
: 15.01.2016
Although it is a manufacturing company, it does not
satisfy section 199(1)(a), because it was set up and registered before 01.03.2016.
Therefore, section 199 cannot be invoked merely because its present business is
manufacturing.
(b) Condition
2 – Restriction on Nature of Business [Section 199(1)(b)]
Section 199(1)(b) prescribes an exclusive-business
condition for a company seeking to avail itself of the concessional regime
under section 199. The company must not be engaged in any business other than
the following permitted activities:
- manufacture
or production of any article or thing;
- research
in relation to such article or thing manufactured or produced by the
company; or
- distribution
of such article or thing manufactured or produced by the company.
Thus, the business activities of the company must be
confined to the manufacture or production of an article or thing and activities
directly connected therewith, namely, research relating to such article or
thing and distribution of such article or thing manufactured or produced by the
company.
EXAMPLE 1 – MANUFACTURING AND DISTRIBUTION OF OWN
PRODUCTS
ABC Ltd. manufactures refrigerators. It:
§ manufactures
refrigerators;
§ carries
out research and development relating to improvement of refrigerators
manufactured by it; and
§ distributes
refrigerators manufactured by it.
These activities fall within the activities
specifically permitted under section 199(1)(b). Accordingly, the condition
relating to the nature of business is satisfied, subject to fulfilment of the
other conditions prescribed under section 199.
EXAMPLE 2 – MANUFACTURING AND UNRELATED TRADING
BUSINESS
XYZ Ltd.:
·
manufactures electrical equipment; and
·
independently carries on a business of trading in
imported mobile phones.
The business of trading in imported mobile phones is
neither the manufacture or production of an article or thing, nor research in
relation to an article or thing manufactured or produced by the company, nor
distribution of an article or thing manufactured or produced by the company.
Accordingly, such unrelated trading activity would
constitute a business other than the businesses permitted under section
199(1)(b). Consequently, the company would not satisfy the condition prescribed
in section 199(1)(b).
EXAMPLE 3 – MANUFACTURING AND UNRELATED REAL-ESTATE
BUSINESS
ABC Manufacturing Ltd. manufactures machinery and,
in addition, carries on a separate business of real-estate development.
The real-estate development business is not one of
the activities specified in section 199(1)(b). Therefore, where the company is
carrying on such business as a separate business activity, the requirement that
the company should not be engaged in any business other than the businesses specified
in section 199(1)(b) would not be satisfied.
Consequently, the company cannot claim the
concessional regime under section 199 merely on the ground that a substantial
portion of its income is derived from the manufacturing business.
ASSESSMENT PERSPECTIVE
For the purpose of examining compliance with section
199(1)(b), the Assessing Officer should examine the actual nature and substance
of the business activities carried on by the company during the relevant
previous year. The mere existence of an object or enabling clause in the
Memorandum of Association should not, by itself, be treated as conclusive
evidence that the company has actually carried on such business.
The assessment may, inter alia, involve examination
of the company’s financial statements, profit and loss account, notes to
accounts, tax audit report, nature of receipts and expenditure, business
agreements, invoices, segmental information, details of investments and other
relevant material to ascertain whether the company has actually carried on any
business other than the businesses permitted under section 199(1)(b).
Therefore, the condition is concerned with the
business actually carried on by the company and not merely with the objects for
which the company is incorporated.
(c) Condition 3 : Specified deductions cannot be
claimed [Section 199(1)(c)]
Section 199(1)(c) requires that total income be
computed without certain specified deductions. These broadly fall into three
categories:
(i) Under section 199(1)(c)(i), the company is
required to compute its total income without claiming certain specified
deductions.
(A)
Section 45(2) or section 47(1)(b) :
The
computation must be made without deductions under:
§ section
45(2); or
§ section
47(1)(b).
(B)
Chapter VIII-C except section 146 :
No deduction under Chapter VIII-C is
permissible, except section 146.
(C)
Specified deductions under section 205(1)(a) to (g) :
The deductions specified in section
205(1)(a) to (g) cannot be claimed
(ii) Brought-forward loss attributable to those
deductions cannot be set off [Section 199(1)(c)(ii)]
Section 199(1)(c)(ii) provides that if the company
has a brought-forward loss from an earlier tax year, and that loss arose
because of those deductions, such loss cannot be set off against the current
year's income while applying section 199.
Deductions/allowances
not available under the concessional regime [Section 199]
|
S. No. |
Reference in Section 199(1)(c)(i) |
Relevant section of Income-tax Act, 2025 |
Subject / Nature of deduction |
Corresponding provision under Income-tax Act, 1961 |
|
(A) |
Section
45(2) |
45(2) |
Expenditure
on scientific research - specified in-house R&D expenditure |
Section
35(2AB) |
|
Section
47(1)(b) |
47(1)(b) |
Expenditure
on skill development project |
Section
35CCD |
|
|
(B) |
Chapter
VIII-C, except section 146 |
138 |
Profits
and gains from infrastructure development, etc. |
Section
80-IA |
|
139 |
Development
of Special Economic Zone |
Section
80-IAB |
||
|
140 |
Specified
business |
Section
80-IAC |
||
|
141 |
Certain
industrial undertakings |
Section
80-IB |
||
|
142 |
Housing
projects |
Section
80-IBA |
||
|
143 |
Certain
undertakings in North-Eastern States |
Section
80-IE |
||
|
144 |
Units
in Special Economic Zones |
Section
10AA |
||
|
145 |
Collection
and processing of bio-degradable waste |
Section
80JJA |
||
|
146 |
Additional employee cost - specifically excluded from the restriction |
Section 80JJAA |
||
|
147 |
Offshore
Banking Units / IFSC Units |
Section
80LA |
||
|
148 |
Certain
inter-corporate dividends |
Section
80M |
||
|
149 |
Income
of co-operative societies |
Section
80P |
||
|
150 |
Interpretation
relating to section 149 |
— |
||
|
151 |
Royalty
income of authors of certain books |
Section
80QQB |
||
|
(C) |
Sections specified in section 205(1)(a) to (g) |
33(8) |
Additional
depreciation |
Section
32(1)(iia) |
|
(b) |
45(3)(a)(i) |
Payment to research
association / university / college / institution for scientific research |
Section 35(1)(ii) |
|
|
45(3)(a)(ii) |
Payment for
research in social science or statistical research |
Section 35(1)(iii) |
||
|
45(3)(b) |
Payment to an
approved company engaged in scientific research & development |
Section 35(1)(iia) |
||
|
45(3)(c) |
Payment to national
laboratory / university / IIT / specified person for approved scientific
research programme |
Section 35(2AA) |
||
|
(c) |
46 |
Capital
expenditure on specified business |
Section
35AD |
|
|
(d) |
47(1)(a) |
Expenditure
on agricultural extension project |
Section
35CCC |
|
|
|
(e) |
48 |
Tea,
coffee and rubber development accounts |
Section
33AB |
|
(f) |
49 |
Site
Restoration Fund |
Section
33ABA |
|
|
(g) |
144 |
Units
in Special Economic Zones |
Section
10AA |
|
|
(ii) |
199(1)(c)(ii) |
199(1)(c)(ii) |
Brought-forward loss attributable to those deductions cannot be set off |
Section 115BA(2)(c)(ii) |
EXAMPLE - 1 : PROHIBITED DEDUCTION
Suppose : ABC Ltd.
|
Particulars |
Amount |
|
Business income before specified deduction |
₹ 10 crore |
|
Deduction otherwise available under a prohibited provision |
₹ 2 crore |
If ABC opts for section 199, it cannot reduce its income by that ₹ 2
crore deduction.
Therefore :
Total income = ₹ 10 crore
Tax : ₹ 10 crore × 25% = ₹ 2.50 crore
EXCEPTION : SECTION 146 DEDUCTION
The wording of section 199(1)(c)(i)(B) specifically excludes section 146
from the prohibition.
Therefore, if a company otherwise satisfies the conditions of section
199, the deduction available under section 146 can continue to be considered.
EXAMPLE – 2 :
ABC Manufacturing Ltd. has :
- income
before section 146 deduction = ₹ 5 crore
- eligible
section 146 deduction = ₹ 20 lakh
Since section 146 is specifically excepted :
Total income = ₹ 5 crore − ₹ 20 lakh = ₹ 4.80
crore
Tax under section 199 : ₹ 4.80 crore × 25% = ₹ 1.20
crore
The ₹ 20 lakh deduction is therefore not lost merely
because the company has opted for section 199.
EXAMPLE – 3 : ATTRIBUTABLE BROUGHT-FORWARD LOSS
Suppose XYZ Ltd. has the following particulars:
- Current-year
business income: ₹5 crore
- Brought-forward
business loss: ₹1 crore
- The
entire brought-forward loss is attributable to a deduction which is not
allowable to a company opting for section 199.
- The
company has exercised the option to be governed by section 199.
In such a case, the company cannot set off the
brought-forward loss of ₹1 crore against the current-year business income
merely because the loss is otherwise eligible for carry-forward and set-off
under the normal provisions.
Accordingly, the company cannot claim set-off of the
brought-forward loss of ₹ 1 crore against the current-year business income and
thereby reduce its taxable income to ₹ 4 crore.
Taxable income = ₹ 5 crore
Tax @ 25% = ₹ 5 crore × 25% = ₹1.25 crore
Hence, tax liability before applicable surcharge and
cess = ₹ 1.25 crore.
Meaning
of “certain manufacturing domestic companies”
The expression “certain manufacturing domestic companies” is not separately
defined in Section 2 of the Income Tax Act, 2025. The class of companies
covered by this expression is determined from the eligibility conditions
prescribed in Section 199(1). Thus, it is a descriptive expression referring to
domestic companies satisfying the conditions specified in Section 199.
Relationship with Sections 199, 200 and
201
|
Section |
Broad subject |
Rate |
|
199 |
Certain
manufacturing domestic companies |
25% |
|
200 |
Certain
domestic companies |
22% |
|
201 |
New
manufacturing domestic companies satisfying additional conditions |
15% |
Section 199 itself expressly operates subject to the
relevant parts of Chapter XIII, other than sections 200 and 201, and section
199(4) specifically refers to exercise of the option under section 200.
[2]
Loss is treated as fully absorbed [Section 199(3)]
Section 199(2) provides that where the loss referred
to in section 199(1)(c)(ii) exists, it is deemed to have been given full effect
to. Consequently : no further deduction for that loss shall be allowed for any
subsequent year.
EXAMPLE - THREE-YEAR ILLUSTRATION
Suppose a company has :
Year 1 :
Prohibited-deduction-related
loss : ₹ 1 crore
Year 2 :
§ current
income : ₹ 4 crore
§ company
opts for section 199
The ₹ 1
crore loss cannot be set off.
Taxable
income = ₹ 4 crore.
The loss
is deemed to have been given full effect.
Year 3 :
Suppose income = ₹ 6 crore.
The company cannot revive the ₹ 1 crore loss and
claim it in Year 3.
Thus : ₹ 6 crore × 25% = ₹ 1.50 crore
The ₹ 1 crore loss is effectively extinguished for
future computation.
[3]
Exercise of option on or before the due date
specified under section 263(1) for furnishing the first return of income
[Section
199(3)]
Section 199 does not automatically apply merely
because the company satisfies the substantive conditions. The
company shall exercise the option:
- in
the prescribed manner (Rule 136); and
- on
or before the due date specified under section 263(1) for furnishing the
first return of income which the company is required to furnish.
BINDING EFFECT : Once exercised, the option cannot
be subsequently withdrawn for that or any subsequent tax year, unless the
company transitions to another statutory option (e.g., Section 200).
Manner
of exercise or withdrawal of option under Section 199(3) [Rule 136 of the Income Tax
Rules, 2026]
Rule 136 of the Income Tax Rules, 2026 prescribes
the manner of exercising or withdrawing the option under Section 199(3). In the
case of a manufacturing domestic company, the option under Section 199(3) shall
be exercised or withdrawn in the return of income to be furnished under Section
263(1) for the relevant tax year. Thus, unlike a separate procedural form, the
statutory election is incorporated in the return of income itself.
Text of Rule 136 of
the Income Tax Rules, 2026
136. Exercise or
withdrawal of option for new tax regime. –
The option to be
exercised or withdrawn under the provisions specified in column B of the
following Table, by a person specified in column C thereof, for any tax year
shall be in the return of income to be furnished under section 263(1) for such
tax year :
Table
|
S. No. |
Section
|
Person |
|
1. |
199(3) |
Manufacturing domestic company. |
|
2. |
200(5) |
Domestic company. |
|
3. |
201(2) |
New manufacturing domestic company. |
|
4. |
202(4) |
Individual or Hindu undivided family, or an
association of persons (other than a cooperative society) or a body of
individuals, whether incorporated or not, or an artificial juridical person. |
|
5. |
203(5) |
Resident co-operative society. |
|
6. |
204(2) |
New manufacturing co-operative society. |
EXAMPLE -
OPTION NOT EXERCISED
Suppose
XYZ Ltd. satisfies every substantive condition:
§ manufacturing
company;
§ incorporated
after 1 March 2016;
§ no
prohibited deductions;
§ otherwise
eligible.
But it
does not exercise the option in the prescribed manner by the applicable due
date.
The mere
fact that it satisfies the conditions does not make section 199 applicable.
[4] Once exercised, option cannot be withdrawn
[Section
199(4)]
Section
199(4) provides that once the option has been exercised, it cannot subsequently be withdrawn for
the same or any other tax year.
Specific
Exception : There is, however, a specific exception : withdrawal is possible
where the person exercises the option under section 200.
Thus,
the section 199 option is substantially a continuing option, rather than an annual election.
EXAMPLE - NO ANNUAL SWITCHING
Suppose
ABC Ltd. exercises section 199 for Tax Year 2026-27.
It
cannot ordinarily say :
§ 2026-27 → section 199
§ 2027-28 → normal regime
§ 2028-29 → section 199 again.
The
statute provides continuity once the option has been exercised.
The
specific statutory exit is through the option contemplated under section 200.
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