Section 199: optional 25% tax rate for manufacturing domestic companies

Introduction

This elective rate is tied to the company's set-up and registration date, its manufacturing or production activity, and a tax computation without specified deductions and related brought-forward losses. All conditions in Section 199(1) must be checked together.

The election is made in the prescribed manner by the due date for the company's first required return under Section 263(1). It continues for later years and ordinarily cannot be withdrawn, though Section 199(4) permits a later option under Section 200.

Key takeaways

The option and its conditions

A domestic company may, at its option, have its total income for a tax year taxed at a flat 25%, subject to Parts A, B and E of this Chapter and to this Part (other than sections 200 and 201), provided:

• The company has been set up and registered on or after 1 March 2016;
• The company is not engaged in any business other than manufacture or production of an article or thing, and research relating to, or distribution of, such article or thing manufactured or produced by it; and
• Its total income has been computed without deduction under section 45(2) or 47(1)(b), without deduction under Chapter VIII-C (other than section 146), and without deduction under the sections listed in section 205(1)(a) to (g); and without setting off any loss carried forward from an earlier tax year that is attributable to those disallowed deductions.

Loss treatment and how the option is exercised

A loss that cannot be set off because it is attributable to a disallowed deduction is deemed to have been given full effect to, so no further deduction for that loss is allowed in any later year.

The option must be exercised in the prescribed manner on or before the due date under section 263(1) for furnishing the first of the returns of income the company is required to furnish; once exercised, it applies to all subsequent tax years.

Once exercised for any tax year, the option cannot be withdrawn for that year or any other year, except where the company instead exercises the option under section 200.

When this provision applies

Confirm domestic-company status, the on-or-after 1 March 2016 setup and registration condition, and the permitted manufacturing or production business with its related research or distribution. Eligibility is not established merely by having a manufacturing activity among several unrelated businesses.

Build a computation that removes the specified deductions and identifies earlier losses attributable to them. Section 199 expressly refers to Section 205(1)(a)–(g); that reference should not be expanded into every separate Section 205 condition meant for another regime.

Limits and procedural safeguards

The 25% rate is subject to the other Chapter Parts stated in subsection (1). It should not be presented as an all-inclusive tax amount for every income category without checking those provisions and applicable additional levies.

The affected carried-forward loss is deemed fully given effect to, not merely parked for a later year. The option continues and cannot be withdrawn except through the specified Section 200 option; a short-term rate comparison is therefore incomplete.

Step-by-step review

1. Verify company dates, domestic status and the permitted scope of business.

2. Prepare the deduction and attributable-loss adjustment schedule, including Section 205(1).

3. Compare the complete computation and continuing consequences with the available alternatives.

4. Verify exercise in the prescribed manner by the first required return’s Section 263(1) due date and retain the election record.

Hypothetical example

Hypothetical illustration: an otherwise eligible company has an earlier loss attributable to a deduction excluded by Section 199. That loss cannot reduce income under the option and is treated as given full effect for future years. A comparison that assumes the loss can simply be saved and used later would misstate the consequence.

Records to prepare

Setup and registration evidence, domestic status and business-activity records.

A provision-wise deduction exclusion and attributable-loss schedule.

The full regime comparison, prescribed election and filing acknowledgement.

Official amended Act source

• Income-tax Act, 2025 as amended by Finance Act, 2026: Section 199 and related provisions

Step-by-step flow for applying Section 199

1. 1

   Is the person a domestic company set up and registered on or after 1 March 2016?

   • No: Section 199 is not available.
   • Yes: Go to the next step.
2. 2

   Is its only business the manufacture or production of an article or thing, and research in relation to, or distribution of, what it manufactures or produces?

   • No: Section 199 is not available.
   • Yes: Go to the next step.
3. 3

   Can total income be computed without the excluded deductions?

   No deduction under Section 45(2) or 47(1)(b), Chapter VIII-C (other than Section 146), or the sections listed in Section 205(1)(a) to (g); and no set-off of brought-forward losses attributable to those deductions. Such losses are deemed to have been given full effect (Section 199(2)).

4. 4

   Has the option been exercised in the prescribed manner by the due date under Section 263(1) for the first return the company is required to furnish?

   • No: The 25% rate does not apply (Section 199(3)).
   • Yes: Go to the next step.
5. 5

   Compute tax at 25% on the total income so computed

   The option then applies to subsequent tax years and cannot be withdrawn, except by exercising the option under Section 200 (Section 199(4)).

Practical checklist

Glossary

Attributable loss

An earlier-year loss linked to deductions excluded by Section 199(1)(c)(i).

Continuing election

The option that applies to subsequent tax years, subject to the stated Section 200 exception.

Frequently asked questions