A 22% tax rate when the headline company rate is 30%? It looks like free money — just tick a box and pay less. That is exactly how Section 115BAA is sold, and for many companies it is the right choice. But for a startup, ticking that box at the wrong time can permanently destroy a far bigger benefit — and you can never undo it.
What the 22% option actually is
Section 115BAA (carried into the Income-tax Act, 2025) lets a domestic company choose a flat 22% tax rate — about 25.17% once you add surcharge and cess — instead of the normal 25% or 30%. As a bonus, companies in this regime pay no MAT (Minimum Alternate Tax). For a steadily profitable company with no special deductions, it is simple and usually worth it.
The price of the lower rate
The 22% comes with a condition: you must give up most exemptions and deductions. That includes additional depreciation, SEZ benefits (Section 10AA), scientific-research deductions, most Chapter VI-A deductions — and, the big one for startups, the Section 80-IAC tax holiday.
The startup trap
Here is what catches founders. A DPIIT-recognised startup can claim the 80-IAC tax holiday — a 100% deduction of profits for any 3 years out of its first ten. During those holiday years your tax can be close to zero. The 22% regime throws that away: you cannot claim 80-IAC and pay 22% at the same time.
And the decision is irreversible. Once you opt into 115BAA, you cannot switch back. Elect 22% during your holiday window and you have swapped a near-zero rate for 25% — permanently.
The numbers, side by side
| Normal regime (with 80-IAC) | Section 115BAA (22%) | |
|---|---|---|
| Rate during holiday | Near zero on holiday profits* | ~25.17% |
| 80-IAC holiday | Kept | Lost — forever |
| MAT | May apply (~17.5% on book profit; credit carried forward) | None |
| Reversible? | Yes — switch to 22% later | No — permanent |
*100% profit deduction under 80-IAC; a minimum tax may still apply on book profits, but it stays well below 22%.
So when is 22% the right call?
- You have no 80-IAC holiday to protect — not a DPIIT startup, or the holiday is already used up.
- You are steadily profitable and currently taxed at the 30% bracket — the saving is real.
- You don’t rely on the deductions you’d be giving up (SEZ, heavy R&D, additional depreciation).
- You want simplicity and no MAT — a clean, predictable rate.
The smart sequence for a startup
For most eligible startups the answer is about timing, not yes-or-no. Stay in the normal regime and use your 80-IAC holiday first. Once the holiday is exhausted (and once you have used up any losses worth carrying), then consider switching to 115BAA for the steady years that follow. You get the best of both — just not at the same time, and not in the wrong order.
How you actually elect it
You opt in by filing Form 10-IC before the due date of your income-tax return for the year you want it to start. Remember: that election is final, so it should follow a deliberate decision, not a box ticked in a hurry at filing time.
Frequently asked questions
What is the tax rate under Section 115BAA?
A flat 22%, which works out to about 25.17% after a 10% surcharge and 4% cess. Companies in this regime also pay no MAT. It replaces the normal 25% or 30% rates, but only if the company gives up most exemptions and deductions.
Can a startup claim the 80-IAC tax holiday and the 22% rate together?
No. To pay 22% under Section 115BAA you must give up the Section 80-IAC startup tax holiday, along with most other deductions. Since 80-IAC gives a 100% profit deduction for three years, a startup in its holiday window is usually far better off staying in the normal regime.
Is choosing Section 115BAA reversible?
No. Once a company opts into 115BAA, the choice is permanent for all future years — you cannot switch back to the old regime. That is why a startup should not elect it during its 80-IAC holiday, because the holiday would be lost forever.
When should a startup switch to 115BAA?
Usually after its 80-IAC holiday is fully used (and after using any worthwhile carried-forward losses). At that point, a steadily profitable company — especially one otherwise taxed at 30% — can benefit from the flat 22% rate and the absence of MAT. The key is sequence: holiday first, 22% later.
How does a company opt for Section 115BAA?
By filing Form 10-IC electronically before the due date for filing the company’s income-tax return for the first year it wants the rate to apply. Because the election is irreversible, it should be a deliberate decision based on proper projections, not a last-minute choice.
CA Vijay R Singh, FCA
Founder, Vijay R Singh & Co., Chartered Accountants · ICAI M.No. 153926 · FRN 136869W
Chartered Accountant for startups, NRIs and SMEs in Mumbai, in practice since 2013. More about CA Vijay →
Educational content, not tax advice — the right choice depends on your projections, deductions and losses; rates quoted include standard surcharge and cess. Consult your advisor before electing 115BAA, as the choice is permanent. Vijay R Singh & Co., Chartered Accountants · FRN 136869W · ICAI M.No. 153926 · Mumbai, in practice since 2013.
