Advanced Direct Tax Laws and Practice · Computation of Total Income, Tax Liability and Filing of Returns of various Entities excluding Companies

Taxation of Cooperative Societies, Local Authorities and Other Entities

Updated 11 October 2026 · Fact-checked

Special entities are taxed outside the individual and company rules. A cooperative society pays tax on its own slab or an optional concessional rate. A local authority pays tax at a flat rate. An AOP, BOI or artificial juridical person follows the section 202 slabs unless it opts out. You solve questions by first identifying the entity, then its rate and its deductions.

Understand Special Entities: Cooperative Societies, Local Authorities and Others

The Act taxes each kind of person under its own rate rule. Individuals, HUFs, AOPs, BOIs and artificial juridical persons sit in one group. Companies sit in another. Cooperative societies and local authorities are separate categories with their own rates. Your first job in any question is to classify the entity correctly.

Section 202 is the default regime for an individual, HUF, association of persons (other than a co-operative society), body of individuals and an artificial juridical person. Note the bracket: a co-operative society is expressly kept out of the AOP category. So a cooperative society never uses the section 202 slabs. It has its own slab rates, plus an optional lower flat rate if it gives up most deductions.

Under section 202(1) the default slabs are: nil up to ₹4,00,000; 5% up to ₹8,00,000; 10% up to ₹12,00,000; 15% up to ₹16,00,000; 20% up to ₹20,00,000; 25% up to ₹24,00,000; and 30% above that. To use the old structure with deductions, the person must exercise the option under section 202(4). For a person with business or professional income, the option must be exercised by the return due date. Once exercised it continues to apply to later years. It can be withdrawn only once, and after withdrawal it is generally never available again unless the business or profession income ceases. A person without business income opts along with the return for each year.

A cooperative society's tax depends on the nature of its activities. It may get a deduction for income from specified activities, such as credit, marketing, processing or consumer activities. It may also get deductions that any business gets under section 32. These include the special reserve deduction for cooperative banks (other than primary agricultural credit societies and primary cooperative agricultural and rural development banks) and the deduction for sugarcane purchase by a sugar cooperative at a price not above the Government-fixed or approved price.

A local authority is a separate taxable person, taxed at a flat rate on its taxable income. Certain contributions get no deduction in its hands. Section 137 allows a deduction for non-cash contributions to a registered political party or an electoral trust, but it excludes a local authority and an artificial juridical person wholly or partly funded by the Government. Always read the condition lines of a section, because the exam tests exclusions.

Key rules to remember

Persons covered by section 202: Individual, HUF, AOP (not a co-operative society), BOI, artificial juridical person under section 2(77)(g); A co-operative society is excluded from the AOP limb. It does not use these slabs.
Default slabs under section 202(1): Up to ₹4,00,000: Nil | ₹4,00,001–₹8,00,000: 5% | ₹8,00,001–₹12,00,000: 10% | ₹12,00,001–₹16,00,000: 15% | ₹16,00,001–₹20,00,000: 20% | ₹20,00,001–₹24,00,000: 25% | above ₹24,00,000: 30%; Applies unless the person exercises the option under section 202(4). Each rate applies only to the income in its band.
Section 202(2) restrictions: No exemption or deduction listed in clause (a); no set-off of loss or depreciation attributable to those deductions; no house property loss set off against other heads; Chapter VIII deductions are barred except those in sections 124(1), 124(2), 125(2) and 146.
Option under section 202(4), business income: Exercise by return due date; continues for later years; one withdrawal only; no re-entry after withdrawal; A person without business income opts along with the return, year by year.
Cooperative society slabs (regular rates): Up to ₹10,000: 10% | ₹10,001–₹20,000: 20% | above ₹20,000: 30%; Add surcharge where applicable and 4% health and education cess. Check the rate schedule of the Finance Act, 2026 for your session.
Optional concessional rates for cooperative societies: 22% flat for a society that forgoes specified deductions; 15% for a new manufacturing society meeting the conditions; These are options, not defaults. Surcharge and cess apply on top. Check the exact conditions in your study text.
Special reserve deduction (section 32(e)): Deduction = amount carried to reserve, limited to 20% of profits from eligible business and to the headroom under 2 × (paid-up capital + general reserves); Applies to specified entities, including banking companies and cooperative banks of the listed type.
Sugar cooperative deduction (section 32(g)): Sugarcane purchase expenditure allowed only up to the Government-fixed or approved price; Any price paid above the fixed or approved price is not allowed under this clause.
Political contributions (section 137): Deduction for contributions other than in cash to a registered political party or electoral trust; Not available to a local authority or an artificial juridical person wholly or partly funded by the Government.

How to solve Special Entities: Cooperative Societies, Local Authorities and Others questions

Use this order for any question on a cooperative society, local authority, AOP, BOI or artificial juridical person.

1Classify the entity from the facts: cooperative society, local authority, AOP, BOI, artificial juridical person or other. Note whether the question says it is a bank, a sugar society or a Government-funded body.
2Pick the rate regime. A cooperative society uses its own slabs or an optional concessional rate. An AOP, BOI or AJP uses section 202 unless it has opted out under section 202(4). A local authority uses its flat rate.
3Compute income head by head. Business income starts with book profit, then add back disallowed items and deduct allowed items such as those in section 32.
4Apply entity-specific deductions only if the conditions are met. Test each condition on the facts, such as the 20% cap and the twice-capital limit for the special reserve.
5If the entity is under section 202, check section 202(2). Drop any deduction that is barred and do not set off house property loss against other heads.
6Apply the rates to the total income band by band, then add surcharge if applicable and 4% cess.
7State the conclusion in one line, with the regime used and the reason.

Quickest way: Classify, then rate, then deductions

When to use it: Use when time is short in a descriptive paper and you must still show provision, analysis and conclusion.

Write the entity type in the first line of your answer. This earns the classification mark.
Write the rate rule in one line, with the section number only where it is in your text, such as section 202.
List the two or three deductions or restrictions the facts point to. Test each one with the facts.
Do the slab arithmetic in a short table of bands, then add cess.
Close with a conclusion sentence that names the regime and the tax payable.

Common mistakes in Special Entities: Cooperative Societies, Local Authorities and Others

Treating a cooperative society as an AOP and applying the section 202 slabs.
A society looks like an association of persons.
Fix: Section 202(1)(c) says AOP 'other than a co-operative society'. Use the cooperative society's own rate rule.
Applying the full slab rate to the whole income instead of band by band.
Students remember the top rate and apply it to everything.
Fix: Split total income into bands and apply each rate only to its band.
Claiming deductions barred by section 202(2) while using the default regime.
The same deductions are allowed under the optional route, so students carry them over.
Fix: Check the barred list first. Only Chapter VIII sections 124(1), 124(2), 125(2) and 146 survive.
Missing the cap in the special reserve deduction.
Students apply only the 20% limit and forget the twice-capital limit.
Fix: Compute both: 20% of eligible profit, and the headroom left under 2 × (paid-up capital + general reserves). Take the lower.
Giving a section 137 deduction to a local authority or a Government-funded AJP, or for a cash contribution.
Students remember the deduction but not the exclusions.
Fix: Re-read the condition: non-cash contribution, registered party or electoral trust, and the excluded persons.
Forgetting that the option under section 202(4) has timing and one-time withdrawal rules.
Students treat it as a free yearly choice.
Fix: For business income: opt by the due date, it continues, withdraw only once, and there is no re-entry afterwards unless business income ceases.

Worked examples

Example 1

A consumer cooperative society has total income of ₹35,000 for the year. It is taxed at the regular cooperative slab rates. Compute tax including 4% cess. Ignore surcharge.

Show the solution

Classify: cooperative society. It uses its own slabs, not section 202.
First ₹10,000 at 10% = ₹1,000.
Next ₹10,000 (₹10,001 to ₹20,000) at 20% = ₹2,000.
Balance ₹15,000 (₹20,001 to ₹35,000) at 30% = ₹4,500.
Tax before cess = ₹1,000 + ₹2,000 + ₹4,500 = ₹7,500.
Cess at 4% = ₹300.

Answer: Tax payable is ₹7,800 (₹7,500 plus cess of ₹300).

Example 2

Mehta & Associates, an association of persons with business income, has total income of ₹14,00,000 for the year. It has not exercised the option under section 202(4). Compute tax before surcharge and cess.

Show the solution

Classify: AOP, not a co-operative society. Section 202(1) applies by default because no option is exercised.
Up to ₹4,00,000: Nil.
₹4,00,001 to ₹8,00,000, which is ₹4,00,000 at 5% = ₹20,000.
₹8,00,001 to ₹12,00,000, which is ₹4,00,000 at 10% = ₹40,000.
₹12,00,001 to ₹14,00,000, which is ₹2,00,000 at 15% = ₹30,000.
Total = ₹20,000 + ₹40,000 + ₹30,000 = ₹90,000.

Answer: Tax before surcharge and cess is ₹90,000. With 4% cess it is ₹93,600.

Exam tips

Begin every answer by naming the entity type. Many marks go to correct classification.
Learn the exclusion words in each section: 'other than a co-operative society', 'other than a local authority', 'wholly or partly funded by the Government'.
Show slab arithmetic band by band, with the cess line, even in short answers.
For the special reserve question, show both limits side by side and take the lower. The examiner looks for both.
Because the paper is open book, mark section 202, section 137 and section 32 in your text so you can quote the exact condition.

Practice questions from Computation of Total Income, Tax Liability and Filing of Returns of various Entities excluding Companies

Special Entities: Cooperative Societies, Local Authorities and Others: frequently asked questions

Is a cooperative society taxed under section 202?

No. Section 202(1)(c) covers an association of persons 'other than a co-operative society'. A cooperative society has its own slab rates or an optional concessional rate.

Can a local authority claim a deduction for donations to political parties?

No. Section 137 allows the deduction to an assessee other than a local authority and an artificial juridical person wholly or partly funded by the Government. The contribution must also be non-cash.

What is the difference between cooperative society and company taxation?

A company is taxed at company rates and has its own rules on book profit and minimum tax. A cooperative society is taxed on its own slabs or an optional lower rate, and it can claim deductions for income from specified cooperative activities. Study both rate schedules side by side.

Can an AOP choose the old regime with deductions?

Yes, by exercising the option under section 202(4). If it has business income, it must opt by the return due date, the option continues in later years, and it can be withdrawn only once.