Section 203: optional 22% tax rate for resident co-operative societies

Introduction

A resident co-operative society can elect the special tax regime in section 203 if it meets the section’s conditions. The option affects allowed deductions, losses and future years.

Key takeaways

The option and how income is computed

A co-operative society resident in India may opt, subject to Parts A, B and E of this Chapter and this Part (other than section 204), to be taxed at a flat 22% on total income computed:

• Without deduction under Chapter VIII (other than section 146, or section 150);
• Without deduction under the sections listed in section 205(1)(a) to (g); and
• Without set-off of any loss carried forward or depreciation from an earlier tax year attributable to those disallowed deductions.

If the conditions are not met, and loss treatment

If the society fails to satisfy these requirements in any tax year, the option becomes invalid for that tax year and all subsequent years, and the rest of the Act applies as if the option had never been exercised for those years.

A loss or depreciation that cannot be set off for this reason is deemed to have been given full effect to, so no further deduction is allowed for it in a later year.

IFSC units and exercising the option

For a society having a Unit in an International Financial Services Centre that has exercised the option under sub-section (5), the requirement above is modified so that the deduction under section 147 remains available to that Unit, subject to that section's conditions.

The option must be exercised in the prescribed manner on or before the due date under section 263(1) for furnishing the return of income; once exercised, it applies to subsequent tax years and cannot subsequently be withdrawn for that or any other year.

Dividend distribution modification

For an assessee that has exercised the option under sub-section (5), the requirement above is further modified so that the deduction under section 149(2)(d)(ii) remains available up to the amount of dividend distributed by the society to its members at least one month before the due date for filing the return of income under section 263(1).

Step-by-step flow for applying Section 203

1. 1

   Is the person a co-operative society resident in India?

   • No: Section 203 is not available.
   • Yes: Go to the next step.
2. 2

   Will total income be computed without the excluded deductions?

   No deduction under Chapter VIII other than Section 146 or 150, or the sections in Section 205(1)(a) to (g); no set-off of brought-forward loss or depreciation attributable to them. An IFSC Unit may still claim Section 147 (Section 203(4)).

3. 3

   Does the society claim the Section 149(2)(d)(ii) deduction?

   It is allowed only up to the dividend distributed to members at least one month before the Section 263(1) due date (Section 203(7)).

4. 4

   Has the option been exercised in the prescribed manner by the Section 263(1) due date?

   • No: The 22% rate does not apply (Section 203(5)).
   • Yes: Go to the next step.
5. 5

   Compute tax at 22% and keep meeting the conditions

   The option cannot be withdrawn (Section 203(6)); if the requirements are not met in a year, it becomes invalid for that and later years (Section 203(2)).

Practical checklist

Glossary

Resident co-operative society

The only class of person that can exercise the Section 203 option.

Dividend cap

The Section 149(2)(d)(ii) deduction is limited to dividend distributed to members at least one month before the Section 263(1) due date (Section 203(7)).

Deemed full effect

Loss or depreciation attributable to excluded deductions is treated as fully used and cannot be claimed in later years (Section 203(3)).

Frequently asked questions