Corporate Tax Planning: formula sheet

Key formulas

Tax planning

Lawful + disclosed + genuine commercial purpose + within letter and spirit of law

All conditions must hold. Saving is a result, not the only motive.

Tax avoidance

Follows the letter of law but defeats its intent; often artificial or without commercial substance

Not a crime by itself, but can be disregarded or attacked under anti-avoidance rules.

Tax evasion

Illegal reduction of tax by concealment, falsification or misstatement

Attracts penalty and prosecution.

Section 159(3)(b), Income-tax Act, 2025

Treaty aim: avoid double taxation without creating non-taxation or reduced taxation through evasion or avoidance, including treaty shopping

Use this to show that treaty relief has an anti-abuse limit.

Section 159(4), Income-tax Act, 2025

Where a treaty applies, the Act applies to the extent more beneficial to the assessee

Subject to sub-section (6): Chapter XI applies even if not beneficial.

Section 159(8), Income-tax Act, 2025

Non-resident claims treaty relief only with a residency certificate from the other country or territory, plus prescribed documents and information

Both conditions are needed.

Residence of a company

Resident = Indian company OR POEM in India in that tax year

Section 6(10)(a). Satisfying either limb makes the company resident. Otherwise it is non-resident.

Place of effective management

POEM = place where key management and commercial decisions for the business as a whole are, in substance, made

Section 6(10)(b). The test is substance, not form.

Scope of total income: resident company

Income received or deemed received in India + income accruing or arising (or deemed so) in India + income accruing or arising outside India

Global income is taxable.

Scope of total income: non-resident company

Income received or deemed received in India + income accruing or arising (or deemed so) in India

Foreign income not received in India is outside scope.

Spread of residence across sources

Resident for one source of income = resident for all sources in that tax year

Section 6(12). A person cannot be resident for some income and non-resident for other income.

Not ordinarily resident

Section 6(13) covers individuals and HUFs only

A company is never NOR.

Preliminary expenses deduction (section 44)

Annual deduction = 1/5 × eligible expenditure, for 5 successive tax years

Applies to an Indian company or a resident non-company assessee. The first year is the year business commences (pre-commencement) or the year extension completes or new unit starts (post-commencement).

Ceiling on preliminary expenses

Total eligible expenditure ≤ 5% of cost of the project, or 5% of capital employed (company, at its option)

Cost of the project means the actual cost of fixed assets such as land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings. Capital employed means issued share capital, debentures and long-term borrowings.

Eligible expenditure for a company

Feasibility and project report, survey, engineering services, legal charges for agreements; plus MoA and AoA drafting and printing, registration fees, and public issue costs

Public issue costs include underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus.

Audit condition for non-company assessees

Accounts audited before the specified date, and audit report furnished for the first year of claim

Applies to a person other than a company or co-operative society.

Relief on shifting undertaking (sections 87 and 88)

If cost of new asset < capital gain: taxable gain = capital gain − cost of new asset. If cost of new asset ≥ capital gain: no capital gain is charged.

The new asset must be bought, acquired or constructed within one year before or three years after the transfer. Section 87 covers shifting from an urban area to a non-urban area. Section 88 covers shifting to a Special Economic Zone. Gain not spent on the new asset must be deposited under the notified scheme before the return is filed and not later than the due date under section 263(1). Proof of deposit must be filed with the return.

Cost of new asset on early transfer

Transfer within 3 years of acquisition: cost = nil (if cost of new asset ≥ gain) or cost reduced by the amount of the capital gain (if cost of new asset < gain)

This is the cost adjustment for computing gain when the new asset is transferred within three years. It applies under both sections. The cost cannot go below nil.

After-tax cost of debt

Kd (after tax) = Interest rate × (1 − Tax rate)

Use the effective tax rate including surcharge and cess. Applies only if the interest is fully deductible.

Tax saving on interest

Tax saving = Interest paid × Tax rate

Interest is a business deduction. It reduces taxable profit, not tax directly.

Dividend cost to company

After-tax cost of equity dividend = Dividend amount

Dividend is not deductible, so there is no tax shield for the company.

Bonus shares: cost and holding

Cost of bonus shares = nil; holding period starts from date of allotment

Gain on sale equals the full sale price less expenses on transfer.

Shareholder's net dividend

Net dividend = Dividend − Tax on dividend at shareholder's rate

Tax is on the shareholder, not on the company.

WDV of a block of assets (section 41(1)(c))

WDV = [(A – D) + B – C] – E

A = opening WDV; B = cost of assets acquired in the year; C = sale money plus scrap, not more than (A – D) + B; D = depreciation allowed on the preceding year; E applies only to slump sale.

WDV of an asset acquired in the year

WDV = actual cost to the assessee

Section 41(1)(a). For earlier years it is cost less depreciation actually allowed (section 41(1)(b)).

Post-tax cost of an expense

Net cost = Expense × (1 – tax rate)

Use for deductible items such as lease rent, repair cost and purchase cost of goods.

Tax saved on depreciation

Tax shield = Depreciation × tax rate

Discount each year's shield if a discount rate is given.

Net present value of cost

PV = Σ [Post-tax cash flow ÷ (1 + r)^t]

Choose the option with the lower present value of cost, or the higher present value of benefit.

Advance tax estimate (section 406)

Advance tax is paid on the current income estimated by the assessee

You may raise or lower the remaining instalments to match the revised estimate.

100% donations without cap

Deduction = whole of the sum paid to funds in section 133(1)(a)(i) to (xxii)

Examples: National Defence Fund, PM CARES Fund, National Children's Fund. These are outside the 10% cap.

100% donations subject to cap

Sum paid to donees in section 133(1)(a)(xxiii) and (xxiv) goes into the capped aggregate; once retained after the cap, it is allowed at 100%

Family planning bodies, and the Indian Olympic Association or notified sports bodies (donor must be a company for clause (xxiv)). They fall within the cap in sub-section (2).

50% donations

Sum paid to donees in section 133(1)(b); once retained after any cap, it is allowed at 50%

Includes Prime Minister's Drought Relief Fund, approved charitable funds, government for charitable purposes. Only (ii) to (vi) fall within the cap. Clause (i) is outside it.

10% cap

Capped aggregate = sums paid under (1)(a)(xxiii), (xxiv) and (1)(b)(ii) to (vi). Cap = 10% × adjusted gross total income. Retained sums = capped aggregate if it is within the cap; otherwise the excess over the cap is ignored. Then apply 100% to retained (1)(a) sums and 50% to retained (1)(b) sums.

Sub-section (2) works on the sums paid, before the 50% is applied. The Act does not say which sums are ignored when the group mixes 100% and 50% items. State your allocation, for example pro rata: retained part of each sum = sum × cap ÷ capped aggregate. Follow the question if it directs otherwise.

Adjusted gross total income

Gross total income − income on which no tax is payable − deductions under other provisions of the Chapter

Defined in section 133(7)(a). Do not use gross total income directly.

Payment conditions

Money only; non-cash mode if donation > ₹2,000

Sub-sections (4) and (5). Cash up to ₹2,000 is acceptable.

Amalgamation: loss moves to amalgamated company

Accumulated loss + unabsorbed depreciation of amalgamating company → deemed loss/depreciation of amalgamated company for the tax year of amalgamation

Section 116(1). Only for the four listed categories. Industrial undertaking means manufacture or processing, software, power, telecom, mining, or construction of ships, aircraft or rail systems.

Conditions on the amalgamating company

Business ≥ 3 years AND ≥ ¾ of book value of fixed assets held 2 years before amalgamation still held continuously on the date of amalgamation

Section 116(4)(a). Both must be met.

Conditions on the amalgamated company

Hold ≥ ¾ of book value of fixed assets acquired, and continue the business, for ≥ 5 years from amalgamation; plus prescribed conditions

Section 116(4)(b). Prescribed conditions ensure revival or genuine business purpose.

Breach consequence

Loss/depreciation set off earlier → deemed income of the year of non-compliance

Section 116(5). Same idea in 116(9) and 116(11) for succession cases.

Demerger: loss directly relatable

Loss directly relatable to transferred undertaking → resulting company

Section 116(6)(a).

Demerger: loss not directly relatable

Apportion in ratio: assets retained by demerged company : assets transferred to resulting company

Section 116(6)(b). Government may notify conditions for genuine business purpose under 116(7).

Carry forward limit

For amalgamation or reorganisation effected on or after 1 April 2025: carry forward ≤ 8 tax years after the year the loss was first computed for the original predecessor entity

Section 116(12). The clock does not restart on amalgamation.

MAT liability

MAT = 14% × book profit

For companies other than an IFSC unit. The rate is 9% for an IFSC unit deriving income solely in convertible foreign exchange.

Tax payable by company

Tax payable = higher of (regular tax on total income, MAT)

If regular tax is lower, book profit is deemed to be total income under section 206(1)(a).

Book profit

Book profit = Profit per P&L + prescribed additions − prescribed deductions ± clause (d) adjustments

P&L is prepared as per Schedule III or the governing enactment. Accounting policies and depreciation method must be the same as those used for the accounts laid before the AGM.

Brought-forward loss deduction

Deduction = lower of (brought-forward loss excluding depreciation, unabsorbed depreciation), as per books

If either amount is nil, the deduction is nil. Special rules apply to companies under CIRP or Companies Act section 241 and 242 cases.

Old MAT credit set-off: domestic company

Maximum set-off in a year = 25% × tax payable on total income under the other provisions

Applies to a domestic company that has opted under section 200(5) or 201(2) for a tax year beginning on or after 1 April 2026. Credit as on 31 March 2026 under section 115JAA of the 1961 Act. Unused credit is carried forward.

Old MAT credit set-off: foreign company

Set-off = tax on total income − MAT, limited to available credit

Allowed only when regular tax exceeds MAT under section 206(1).

Credit carry-forward limit

Not beyond the 15th tax year after the tax year in which the credit first became allowable under section 115JAA of the 1961 Act

Applies to both domestic and foreign companies under section 206(3) and (4).

AMT for non-companies

AMT = 18.5% × adjusted total income

Rate is 9% for an IFSC unit and 15% for a co-operative society. Not applicable to an individual, HUF, AOP or BOI whose adjusted total income does not exceed ₹20,00,000. AMT credit carries forward up to the 15th tax year.

Quick revision

• Tax planning is lawful, tax avoidance exploits loopholes within the letter of law, and tax evasion is illegal.
• Always check residential status first, because it decides which income is taxable in India.
• Compare the tax under each available option before recommending one.
• Remember MAT when a company's taxable income is low compared with its book profit, and check whether it applies under the chosen rate option.
• Section 133(1)(a) gives a deduction for the whole donation to listed funds, such as the National Defence Fund and the PM CARES Fund.
• Section 133(1)(b) allows 50% of the donation for the funds and institutions listed there, such as the Prime Minister's Drought Relief Fund.
• Under section 133(2), the sums in (1)(a)(xxiii) and (xxiv) and (1)(b)(ii) to (vi) are capped at 10% of adjusted gross total income.
• A donation must be a sum of money, and a donation over ₹2,000 must be paid by a mode other than cash.
• A donation deducted under section 133 cannot be claimed again under any other provision.
• Donations for a purpose that is wholly or substantially religious do not qualify as charitable.
• CSR spending under section 135(5) of the Companies Act, 2013 does not qualify for deduction in the Swachh Bharat Kosh and Clean Ganga Fund cases.
• End each answer with a clear conclusion that names the better option.

Common mistakes

• Calling all tax saving illegal. Fix: State that planning is lawful and uses incentives the law gives.
• Treating avoidance and evasion as the same. Fix: Evasion involves concealment or falsity and is illegal. Avoidance uses the law's words against its intent and may not be a crime.
• Treating a foreign company as non-resident because it is incorporated abroad. Fix: Always run the POEM test for a foreign company. Incorporation abroad does not settle it.
• Applying the 182-day or 60-day tests to a company. Fix: Day-count tests in section 6(2) are for individuals. Companies use section 6(10).
• Choosing the form of organisation only on the tax rate of the entity. Fix: Add the tax the owners pay on profit or distributions, and then compare total burden. Mention non-tax factors too.
• Claiming the whole preliminary expenditure in the year it is incurred. Fix: Remember that it is deducted in five equal instalments, starting from the year of commencement or of extension completion, and only up to the 5% ceiling.
• Treating dividend as a deductible expense of the company. Fix: Remember that dividend is an appropriation of profit. Only interest gets the tax shield.
• Using the base tax rate and ignoring surcharge and cess when computing after-tax cost of debt. Fix: Use the effective rate the question gives. If none is given, state your assumption clearly.
• Comparing pre-tax costs only. Fix: Always convert every deductible cost to a post-tax figure before you compare.
• Deducting the full purchase price of an asset in year one. Fix: Treat it as capital. Add it to the block and claim depreciation only as the Act allows. Only the depreciation gives a tax shield.

Exam tips

• Start answers with a crisp definition of all three terms, then compare in points.
• Use a short comparison on legality, intent, timing, disclosure and consequence.
• Quote McDowell, Azadi Bachao and Vodafone with one-line holdings only.
• In case questions, give a verdict first and then reasons from the facts.
• Mention section 159 of the Income-tax Act, 2025 when a treaty or cross-border structure appears.
• Answer in the order of provision, facts, conclusion. Quote section 6(10) first, then apply it to the facts.
• In POEM questions, pick out facts showing where decisions are made in substance and say why other facts, such as incorporation, do not decide the point.
• Always state both limbs of section 6(10): Indian company, or POEM in India.