Tax and Structuring Decisions a Finance Lead Owns
A finance lead does not do the tax return. What a finance lead owns is the set of decisions that determine what the return says: which regime the company sits in, how surplus is returned to shareholders, how employees are incentivised, and how a foreign parent relationship is priced. Every one of those moved between October 2024 and April 2026.
- Corporate rates and the concessional regimes under both Acts
- Minimum alternate tax after the 2026 reduction
- Buybacks, which changed twice in eighteen months
- Employee share options, and transfer pricing when a foreign parent arrives
Two Acts, the same economics, different section numbers
For FY 2025-26 the 1961 Act applies. From tax year 2026-27 the 2025 Act applies. The substantive rates carried over; the numbering did not.
| Regime | 1961 Act | 2025 Act | Rate |
|---|---|---|---|
| Standard domestic rate | 30 per cent, reduced to 25 per cent where turnover in the second preceding year did not exceed ₹400 crore, plus surcharge and cess | ||
| Concessional regime | Section 115BAA | Section 200 | 22 per cent plus 10 per cent surcharge plus 4 per cent cess, an effective 25.17 per cent. Irrevocable, and excludes minimum alternate tax. |
| New manufacturing regime | Section 115BAB | Section 201 | 15 per cent plus surcharge and cess, an effective 17.16 per cent. Irrevocable, and in practice closed: the company must have been set up on or after 1 October 2019 and have begun manufacturing on or before 31 March 2024, and the 2025 Act carried that deadline across. A company starting production now does not qualify merely because the section still exists. |
| Foreign company | 35 per cent, reduced from 40 per cent by the Finance (No. 2) Act 2024, plus surcharge and cess |
Reduced, and the credit mechanism switched off
The Finance Act 2026 reduced minimum alternate tax from 15 to 14 per cent of book profit with effect from 1 April 2026, and stopped the generation of new credit from tax year 2026-27. The 9 per cent rate for a unit in an international financial services centre is unchanged, and it requires the company to derive its income solely in convertible foreign exchange. The provision sits at section 206(1) of the 2025 Act.
Legacy credit from the 1961 Act is where forecasts go wrong, because it does not get a fresh fifteen years. It runs only for the remainder of the fifteen tax years from the year in which it first became allowable. A domestic company can use it only if it opts into the concessional regime under section 200(5) or section 201(2), and then only against up to 25 per cent of the tax otherwise payable for the year; a company that stays in the normal regime cannot use it at all. A foreign company sets its credit against the excess of normal tax over minimum alternate tax, without that 25 per cent cap. The recoverability question therefore turns on three inputs: the year the company expects to switch regime, each tranche's own expiry date, and the annual cap.
Alternate minimum tax on non-corporate taxpayers sits at section 206(2), with the charge in section 206(2)(a). Section 207 is the successor to section 115A on non-resident dividends, royalties and technical service fees, and has nothing to do with it. Its reach was not widened at enactment: section 206(2)(c) applies alternate minimum tax only where the taxpayer claims a deduction under Chapter VIII-C other than section 149, or under section 46, so a limited liability partnership claiming none of them stays outside. What an LLP does not get is the ₹20 lakh adjusted total income exemption in section 206(2)(d)(iii), so an LLP that does claim one of those deductions can be caught below that figure. Alternate minimum tax credit continues under section 206(2)(e) to (i): the abolition of new credit and the 25 per cent cap are corporate rules and do not read across.
Two regimes in eighteen months, and a third from 2026
This is the clearest example on the page of why a rate table without a date label is useless.
| Period | Treatment |
|---|---|
| To 30 September 2024 | The company paid buyback distribution tax under section 115QA. The receipt was exempt in the shareholder's hands. |
| 1 October 2024 to 31 March 2026 | The company-level tax was withdrawn and the whole of the consideration was taxed in the shareholder's hands as a deemed dividend under section 2(22)(f), at applicable rates, with no deduction for what the shares had cost. Section 46A separately deemed the consideration nil for the capital gains computation, so the cost came through as a capital loss. That loss could not be set against the dividend, only against eligible capital gains, so recognising it often produced no saving at all. The company withheld at 10 per cent for residents under section 194, which was a withholding rate and not the final liability. |
| From 1 April 2026 | Capital gains again. Section 69 of the 2025 Act, as amended by the Finance Act 2026, computes the gain after the cost of acquisition. Section 69(2)(b) then adds a further tax where the seller is a promoter, and that additional tax, not the general rule, is what is confined to a buyback under section 68 of the Companies Act 2013. |
The swing is large enough to be worth an illustration. On ₹150 of consideration for shares that cost ₹100, a shareholder in the middle period was taxed on ₹150 of dividend and left holding a ₹100 capital loss of uncertain value. The same buyback today is a ₹50 capital gain.
| Gain | Ordinary rate | Promoter that is a domestic company | Any other promoter |
|---|---|---|---|
| Short-term under section 196 | 20 per cent | 20 plus 2, so 22 per cent | 20 plus 10, so 30 per cent |
| Long-term under section 197 or 198 | 12.5 per cent | 12.5 plus 9.5, so 22 per cent | 12.5 plus 17.5, so 30 per cent |
The 22 and 30 per cent columns are combined base rates, not effective ceilings: a 12 per cent surcharge under section 3(6) of the Finance Act 2026 applies to the additional tax alone, the ordinary capital gains tax carries its own surcharge, and 4 per cent cess sits on both. A short-term gain outside section 196, which includes the ordinary short-term gain on unlisted shares, carries no additional tax and stays at its own rate. A foreign company promoter falls in the last column.
Promoter is defined in section 69(3), and in two different ways. Where the shares are listed on a recognised Indian stock exchange it takes the definition in regulation 2(k) of the buy-back regulations, which pulls in the promoter group. For any other company it is a promoter within section 2(69) of the Companies Act, or anyone holding directly or indirectly more than ten per cent. Exactly ten per cent is outside it, and a purely passive investor above it is inside, which is not what the word promoter suggests to most people.
A buyback completed between 1 October 2024 and 31 March 2026 keeps the treatment in the middle row; none of the 2026 position applies to it retrospectively. There is no single rate to quote for that period, because the dividend was taxed according to who held the shares: slab rates for a resident individual, the corporate rate for a resident company, and generally 20 per cent for a non-resident subject to treaty relief, with surcharge and cess. A capital loss validly carried forward from those years survives the change of Act under section 536(2)(n), for the remainder of its original eight years rather than a fresh eight.
Perquisite on exercise, and a deferral for some
Options are taxed twice: as a perquisite on exercise, on the difference between fair market value and exercise price, and as a capital gain on eventual sale. Under the 1961 Act the perquisite sat at section 17(2)(vi) with withholding under section 192. Under the 2025 Act it sits at section 17(1)(d), valued under section 17(4)(h) at fair market value on the date the option is exercised less what the employee paid or had recovered from them, with withholding under section 392.
Eligible start-ups get a deferral of the perquisite tax, which matters enormously to an employee facing a tax bill on an illiquid share. Under the 1961 Act it ran to the earliest of 48 months from the end of the relevant assessment year, sale of the shares, or cessation of employment. Under section 392(3) of the 2025 Act, read with section 289(3), it is 60 months from the end of the tax year in which the shares are allotted or transferred, and the tax is due within fourteen days of the earliest of that expiry, the sale, or the employee leaving.
That is not an extra year, and describing it as an extension in an employee communication is wrong. The assessment year followed the income year, so 48 months from the end of one and 60 months from the end of the other fall on the same day. What decides which version applies is when the shares are allotted or transferred, not when the option is exercised: exercise fixes the valuation date, and an allotment before 1 April 2026 keeps its old treatment under the savings provisions.
The eligibility gate is stricter than founders expect. Eligible start-up is defined by reference to the tax holiday provision, so recognition alone is not enough: section 140(16)(b)(iii) requires a certificate of eligible business from the Inter-Ministerial Board, and the rest of the section 140 conditions have to be met too. A large proportion of recognised start-ups do not hold that certificate. Check the certificate itself before any communication goes out to employees, not the recognition certificate and not a pending application.
What arrives with a foreign parent
| Obligation | Threshold |
|---|---|
| Accountant's report on international transactions | Every international transaction with an associated enterprise, irrespective of value. Specified domestic transactions above ₹20 crore. |
| Contemporaneous documentation | Aggregate international transactions exceeding ₹1 crore |
| Master file | Consolidated group revenue exceeding ₹500 crore, and either aggregate international transactions exceeding ₹50 crore or international transactions in intangible property exceeding ₹10 crore. The group revenue test has to be met either way, and all three are 'exceeds' rather than 'or more'. The ₹10 crore limb measures transaction value, not the intangibles on the balance sheet. These thresholds govern Part B of the form; Part A is required even below them. |
| Country by country report | Consolidated group revenue of the preceding accounting year exceeding ₹6,400 crore, the same figure under the 1961 Act with rule 10DB(6) and under the 2025 Act with rule 124(7). For a reporting year ending 31 March 2026 the year tested is 2024-25. The ₹5,500 crore still in circulation was replaced in April 2021. |
Three things worth knowing beyond the thresholds. In March 2025 the Board raised the safe harbour ceiling from ₹200 crore to ₹300 crore for software development, information technology enabled services, knowledge process outsourcing and contract research and development in software development or generic pharmaceutical drugs, and added lithium-ion batteries for electric and hybrid vehicles to core auto components, for assessment years 2025-26 and 2026-27.
That has since been overtaken, which matters if you are pricing a captive for the years ahead. The Income-tax Rules 2026, in force from 1 April 2026, run safe harbour in blocks of three tax years beginning with 2026-27; combine software development, information technology enabled services, knowledge process outsourcing and software contract research into one information technology services category with a ceiling of ₹2,000 crore of operating revenue and a minimum margin of 15.5 per cent of operating expense; and keep generic pharmaceutical contract research separate at ₹300 crore and 24 per cent. An option validly exercised for information technology services runs for five consecutive tax years, with the ceiling tested in the first of them.
And a block assessment option now allows an arm's length price determined for one year to be applied to the same transaction for the two following years, which for a captive services entity removes a great deal of recurring cost.
The accountant's report provision is section 92E under the 1961 Act and section 172 under the 2025 Act. The forms were renumbered with the Income-tax Rules 2026: the accountant's report is Form 48, the master file is Form 56 and the country by country report is Form 59, replacing Forms 3CEB, 3CEAA and 3CEAD. The associated intimations are Forms 57, 58 and 60.
Where to go next
Virtual CFO
Back to the main page: how the engagement is structured, who it suits, and how to reach us.
When You Need a CFO, and When You Need a Virtual One
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Raising Capital: Instruments, Valuation and the Filings That Follow
Convertible instruments and what they are under Indian law, valuation requirements for resident and non-resident investors, the share premium charge that was abolished and the one that was not, and the filing deadlines that follow a round.
Restructuring and Growth: Mergers, Reorganisation and What Replaced Fast-track Insolvency
The fast-track merger route as widened in September 2025, the tax trap inside it, the reverse flip home, and the creditor-initiated process that replaced fast-track insolvency for start-ups in May 2026.
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If one thing on this page applies to you, it is probably the buyback timing or the share option deferral. Both are worth a conversation before anything is committed.
This page is general information, not professional advice. Almost every rule a finance lead relies on in India moved between October 2024 and April 2026. The Income-tax Act 2025 renumbered every section from 1 April 2026, the treatment of share buybacks changed twice in eighteen months, the fast-track merger route was widened, the fast-track insolvency route for start-ups was abolished, and the recognition definition for start-ups was replaced. Nothing on this page is advice on your facts. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.