Corporate rates, the 22% concessional regime, dividends, and when incorporation pays
A private limited company is a separate legal entity with limited liability, taxed at corporate rates rather than slab rates. A domestic company pays 25% where turnover is up to Rs 400 crore (otherwise 30%), or it can opt into the concessional 22% regime under Section 115BAA by giving up most incentives, plus surcharge and 4% cess in each case. A new manufacturing company can opt for 15% under Section 115BAB. Dividends are taxable in the shareholder's hands (the old dividend distribution tax is gone), so owner-managers plan the split between salary and dividend. The cost is heavier compliance: a statutory audit every year, ROC filings and board formalities.
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The corporate tax rates
A domestic company's headline rate is 25% if turnover in the relevant year is up to Rs 400 crore, otherwise 30%, plus surcharge and 4% cess. Most owner-managed companies instead opt into Section 115BAA, a flat 22% (plus 10% surcharge and 4% cess, an effective rate of about 25.17%) in exchange for giving up most deductions and incentives and the minimum alternate tax (MAT). A genuinely new manufacturing company can opt for 15% under Section 115BAB. Once you opt into 115BAA, the choice is generally irreversible.
Salary versus dividend
An owner-manager draws money from the company as salary, as dividend, or both, and the mix affects total tax. Salary is deductible to the company and taxed in your hands at slab rates (and attracts payroll TDS under Section 192). Dividend is paid out of post-tax profit and taxed in your hands at slab rates (with 194 TDS over the threshold), with no deduction to the company. Because the company has already paid corporate tax on profit before dividend, the planning question is which mix minimises the combined company-plus-personal tax for your numbers.
tipSalary reduces company profit (deductible) but is taxed at your slab rate; dividend comes from already-taxed profit. The optimal split depends on your slab and the company rate, model it rather than assuming all-salary or all-dividend.
The compliance cost
A company always has a statutory audit under the Companies Act, regardless of turnover, plus annual ROC filings (AOC-4, MGT-7), board meetings and minutes, and director KYC. This is materially more than a proprietorship or even an LLP. So incorporate when the limited liability or the salary-dividend planning genuinely justifies that cost, typically at higher, stable profits, real liability exposure, or an investor or client requirement.
warningA company cannot use presumptive taxation (44AD/44ADA), and the annual statutory audit is unavoidable. Factor the recurring compliance cost into the decision to incorporate.
Income-tax Act 1961 s.115BAA (22% concessional company rate) + s.115BAB (15% new manufacturing) (re-enacted in the Income-tax Act 2025)
Income-tax Act 1961 s.115JB (MAT, not applicable under 115BAA/115BAB)
Income-tax Act 1961 s.194 (TDS on dividend) + s.192 (TDS on salary)
Frequently asked questions
What rate of tax does a private limited company pay?+
A domestic company pays 25% if turnover is up to Rs 400 crore, otherwise 30%, plus surcharge and 4% cess. Most owner-managed companies opt into the concessional 22% under Section 115BAA (effective about 25.17% with surcharge and cess) by giving up most incentives. A new manufacturing company can opt for 15% under Section 115BAB.
How are dividends from my company taxed?+
In your hands, at your slab rate, the old dividend distribution tax was abolished. The company pays the dividend out of post-tax profit (no deduction), and you pay tax on it as income, with 194 TDS deducted over the threshold. This is why owner-managers plan the balance between salary (deductible to the company) and dividend.
Should I incorporate as a private limited company?+
Incorporate when limited liability matters (staff, premises, large contracts), when salary-versus-dividend planning saves real tax at your profit level, or when an investor, client or lender requires a company. Against that, weigh the unavoidable annual statutory audit and ROC compliance, and the loss of presumptive taxation.
Can a company use presumptive taxation?+
No. Sections 44AD and 44ADA are not available to companies, a company must compute actual profits and have a statutory audit every year regardless of turnover. If the simplicity of presumptive taxation matters to you, a proprietorship or general partnership keeps that option, a company does not.