CS Executive · Tax Laws and Practice

Classification and Tax Incidence on Companies: formula sheet

Full chapter guide

Key formulas

Domestic company: Domestic company = Indian company, or other company that has made prescribed arrangements for declaring and paying dividends in India; The second limb is for companies not registered in India. Do not stop at 'registered in India' when the facts mention dividend arrangements.
Foreign company: Foreign company = company that is not a domestic company; It is a residual class. Test domestic status first.
Public-interest company: Company in which the public are substantially interested = Government or statutory body owned, section 8 company, listed company (other than fixed-dividend preference shares) or other class specified in the Act; Check each limb's conditions in the study material.
Closely held company: Closely held company = any company that is not a company in which the public are substantially interested; It is also a residual class.
Loss carry-forward test for closely held companies (section 119(3)(a)): Shares with ≥ 51% voting power held on last day of tax year by the persons who held ≥ 51% on last day of the loss year; Applies on change in shareholding of a company that is not a public-interest company.
Eligible start-up relief (section 119(3)(b)): All loss-year shareholders still hold shares on last day of tax year, and loss incurred within 10 years from incorporation; Allowed regardless of the change in percentage, for an eligible start-up referred to in section 140.
Resident company: Resident = Indian company OR place of effective management (POEM) in India in that tax year; Section 6(10)(a). Either condition alone is enough. Test it year by year.
Non-resident company: Non-resident = not an Indian company AND POEM not in India in that tax year; Both tests must fail. A foreign company with POEM abroad is non-resident.
Place of effective management: POEM = place where key management and commercial decisions necessary for the conduct of the business of the company as a whole are, in substance, made; Section 6(10)(b). The test is substance, not the registered office.
One source resident, all sources resident: Resident for any source of income ⇒ resident for every other source in that tax year; Section 6(12). Status is a single status for the whole tax year.
ROR/RNOR for companies: Company status = Resident or Non-resident only; Not ordinarily resident applies to individuals and HUFs, not to companies.
Resident person: scope of total income: Section 5(1): income received or deemed received in India + income accruing or arising (or deemed) in India + income accruing or arising outside India; Worldwide income. For a person who is "not ordinarily resident" under section 6(13), foreign income is included only if derived from a business controlled in or a profession set up in India.
Non-resident person: scope of total income: Section 5(2): income received or deemed received in India + income accruing or arising (or deemed) in India; Foreign income not received in India is not taxed.
Balance sheet rule: Section 5(3): foreign-accruing income is not deemed received in India only because it is shown in a balance sheet prepared in India; Use this to reject the argument that book entries in India create receipt in India.
No double inclusion: Section 5(4): income taxed on accrual or deemed accrual is not taxed again on receipt or deemed receipt in India; The same income is counted once.
Quick scope grid: Indian income (received or accrued) = taxable for all companies; foreign income received abroad = taxable only for resident (subject to the NOR limit); Use this as a first-pass classification of each item.
Tax on total income: Tax = Total income × applicable company rate; Flat rate, no slabs. Check which regime the company is in before choosing the rate.
Total tax liability: Tax payable = (Tax + Surcharge) + Cess at 4%; Cess is on tax plus surcharge. Surcharge is added only when income crosses the threshold.
Normal domestic company rates: Base 30% (lower rate for companies within the ₹400 crore turnover limit); indicative surcharge 7% if income > ₹1 crore up to ₹10 crore, 12% if > ₹10 crore; The surcharge figures are indicative and not from section 206. Confirm them against the Finance Act, 2026 and your study material. Marginal relief applies near each threshold.
Concessional regime: 22% + indicative surcharge 10% flat (if income exceeds the threshold) + cess 4%; Confirm the surcharge rate and threshold against the Finance Act, 2026. If the surcharge is 10%, the effective rate is 22% × 1.10 × 1.04 = 25.168%. Without surcharge: 22% × 1.04 = 22.88%.
Foreign company: Base 35%; indicative surcharge 2% if income > ₹1 crore up to ₹10 crore, 5% above ₹10 crore; cess 4%; Surcharge figures are indicative; confirm them against the Finance Act, 2026. Special lower rates apply to certain incomes such as royalty and fees for technical services.
MAT, section 206(1): If tax on total income < 14% × book profit, tax payable = 14% × book profit; IFSC unit earning solely in convertible foreign exchange: 9%. Book profit is deemed to be total income for this purpose. Section 206(1)(l) exempts certain foreign companies, for example a treaty-country resident with no permanent establishment in India.
MAT credit: No fresh credit for MAT paid from 1 April 2026; The earlier credit clauses of section 206(1) were omitted from 1 April 2026. Credit under section 115JAA brought forward as on 31 March 2026 is dealt with under section 206(3) for a domestic company that opted for the concessional regime and under section 206(4) for a foreign company.
Use of old credit by a domestic company that opted for the concessional regime: Set-off each year ≤ 25% of tax payable on total income; Section 206(3)(b). The credit cannot be carried beyond the fifteenth tax year after the year it first became allowable under section 115JAA.
Use of old credit by a foreign company: Set-off in a year = up to (tax on total income − MAT), only when tax on total income exceeds MAT; Section 206(4)(b). The same fifteenth-tax-year limit applies.
Alternate minimum tax (non-company): AMT = 18.5% × adjusted total income (co-operative society 15%; IFSC unit 9%); Section 206(2). It applies only to persons other than companies who claim specified deductions.
Employer contribution deduction (Government employer): Deduction = lower of (actual employer contribution, 14% × salary); Applies where the employer is the Central Government or a State Government. Section 124(1)(a).
Employer contribution deduction (other employer): Deduction = lower of (actual employer contribution, 10% × salary); Applies to companies and all other employers. Section 124(1)(b). Salary = basic + DA (only if terms of employment so provide).
Rate where section 202(1) applies: If total income is chargeable to tax under section 202(1), 10% is read as 14%; Section 124(2). Check the condition in section 202(1) before using 14% for a non-Government employer.
Own contribution deduction: Deduction ≤ ₹50,000 (sub-sections (3) and (4) together); Available to any individual. Includes payments to a minor's account by a parent or guardian, within the same ₹50,000 overall limit.
Employer's own deduction: Employer deduction ≤ 14% × employee's salary; Section 29(1)(b). Salary includes DA only if the terms of employment so provide; other allowances and perquisites are excluded.
No double deduction: Amount claimed under section 124(3) cannot also be claimed under section 123; Sub-sections (5) and (10).
Taxability on exit: Amount received on closure, opting out, or annuity pension = income of the year of receipt; Sub-section (6). Not taxed if received by nominee on death of assessee (sub-section (7)) or used to buy an annuity in the same tax year (sub-section (9)).

Quick revision

Classify first: Indian or foreign company, then domestic or other.
An Indian company is always resident in India.
A foreign company is resident only if its place of effective management is in India in the tax year.
A resident company is taxed on its global income.
A non-resident company is taxed only on income received or deemed received in India, or accruing, arising or deemed to accrue or arise in India.
Decide residential status before listing any income.
Check the conditions of each special rate regime before choosing it.
Section 124 is a deduction for an individual assessee (for example an employee), not for a company.
Section 124(1): an individual employee gets a deduction for the employer's contribution to a notified pension scheme, up to 14% of salary where the employer is the Central or State Government, and 10% for other employers.
Section 124(2): where total income is chargeable to tax under section 202(1), the 10% limit becomes 14%.
For Section 124, salary means basic pay plus dearness allowance if the terms of employment so provide, and excludes other allowances and perquisites.
Section 124(3) and (4): an individual's own contribution is deductible up to Rs. 50,000, and the parent or guardian's payment for a minor falls within the same overall cap of Rs. 50,000.
Section 124(5) and (10): no deduction under (3) and (4) for an amount already deducted under section 123.
Section 124(6) is the charging rule: the amount received on closure or opting out of the scheme, and the pension from an annuity bought then, is taxed as income of the year of receipt.
Exceptions to 124(6): the nominee's receipt on the assessee's death is not income (sub-section (7)); the receipt by the parent, guardian or nominee on the minor's death is not income (sub-section (8)); and an amount used to buy an annuity in the same tax year is deemed not received (sub-section (9)).
Section 124(11) and (12): for a Unified Pension Scheme subscriber, amounts received on superannuation, voluntary retirement or retirement under Fundamental Rules 56(j) are taxed; the amount is deemed not received if transferred to the pool corpus from the individual corpus.

Common mistakes

Treating every company with foreign shareholders as a foreign company. Fix: Classify by registration in India or the dividend arrangements. Shareholder nationality alone does not make a company foreign.
Calling every unlisted company closely held without checking other limbs. Fix: Check the other limbs too, such as Government ownership and section 8 companies, before concluding it is closely held.
Saying a company is non-resident because all its directors and business are abroad, even though it is incorporated in India. Fix: Always check the Indian company test first. An Indian company is resident regardless of where it is managed.
Treating the registered office or place of board meetings as the place of effective management. Fix: Use the definition: where key management and commercial decisions are made in substance. Look at who really takes the decisions.
Taxing a non-resident company on its foreign income received abroad. Fix: Check status first. Section 5(2) limits a non-resident to income received or accruing in India.
Treating foreign income as received in India because it is shown in the Indian balance sheet. Fix: Section 5(3) says income accruing outside India is not deemed received in India only for that reason.
Applying slab rates to a company. Fix: State at the start that a company pays a flat rate. Slabs do not apply.
Charging surcharge on companies with income below the threshold. Fix: Check the income limit first. Take the surcharge rates and thresholds from the question or confirm them from the Finance Act, 2026 and your study material.
Using gross salary or including all allowances as the base for the 10% or 14% cap. Fix: For this section, include only basic pay and DA (and DA only if the terms of employment so provide). Exclude other allowances and perquisites.
Using 14% for a company employer. Fix: For the employee's deduction under section 124(1), a company is covered by the 10% limit, unless sub-section (2) applies. The 14% limit under section 29(1)(b) is for the employer's deduction.

Exam tips

Begin every classification answer with the two labels, for example 'domestic and closely held', then give the reason.
Learn the definitions in your own words, and learn the limbs of the public-interest definition from the study material.
Link the class to its consequence, such as the 51% loss rule in section 119(3). Examiners reward the application, not only the definition.
Quote section numbers only where you are sure: 119(3), 119(4) and 159(5) from the Income-tax Act, 2025.
Finish with a clear one-line conclusion that answers the exact question asked.
Write the section number in your answer: section 6(10) for the company test and 6(10)(b) for the POEM meaning. ICSI-style answers give the provision, the facts, then a conclusion.
In fact-based questions, quote the phrase 'in substance' and link it to the facts. This shows you applied the test and did not just copy it.
Always name the tax year in the conclusion, since status is decided year by year.