Companies Under Income Tax?

What is Company Under Income Tax?

Under the Income Tax Act, there are various types of companies in India. Different sections in the Income Tax Act deal with these companies’ definitions and scope. The most basic structure of companies is a private limited company, a public limited and a one-person company. Apart from these, there are other companies as per sections 2(17), 2(18), 2(26), 2(22A), and more. A group of individuals engages to establish a company for commercial or industrial purposes. This blog has included all about are types of companies under income tax and others as well.

Companies are classified as domestic and foreign under section 2(22) of the Income Tax Act, and such companies can have a variety of structures or business models.

Company Structure in India

As per section 2(18), a company in which the public is substantially interested is a public limited company. Such a company is owned by the government or the Reserve Bank of India. In such a company, not less than 40% of the shares are held by the Government or the RBI, or a corporation by the RBI. There are several other types of companies that individuals seeking to start a business can form in India.

1. Sole proprietorship: A business managed by a single person in India is called a sole proprietorship. In general, this type of business does not require registration as it is not mandated by the law
2. Partnership: When two or more partners come together to form a business and divide the profits and losses based on the partnership deed, such is the structure of a partnership firm. A minimum of two but a maximum of 20 partners can form a partnership firm in India
3. Limited liability company: It is a limited liability business that includes features of both a partnership and a corporation. Members enjoy protection as they have limited liability for the business
4. Corporation: In this kind of business structure, a business and its shareholders are legally separate, and it can issue stock to raise capital. Shareholders enjoy limited liability protection, and the corporation is taxed separately from its shareholders
5. Cooperative: It is a democratic and autonomous model of business that is owned and controlled by members who share in profits and decision making
6. Nonprofit: a type of organization that exists for educational, charitable, or religious purposes and enjoys tax exemption

These are some of the business structures that can be formed. Many provisions and taxation rules are attached to these business models.

Income Tax Provisions for Companies

Taxation of companies

Sections 115BA, 115BAA deal with the taxation of companies. The rate of taxation depends on company type and annual income. In the budget 2025, it is announced that companies engaged in manufacturing or production and registered on or after 1^st of October 2019 are taxed at 15% under section 115BAB.

Domestic companies have to pay tax on dividend distribution, and it depends on the dividends declared or distributed among the shareholders, though foreign companies are exempted from dividend distribution tax.

Capital gains earned by the companies are taxed based on the holding period and the nature of the assets. Long-term capital gains (LTCG) are taxed at a comparatively lower rate than short-term capital gains (STCG). The LTCG is taxed at 12.5% while the STCG is taxed at 20%. 

Companies are also allowed to claim certain deductions and exemptions, and these are subject to certain conditions and limitations. Deductions are allowed on capital expenditure except for land, goodwill, and financial instruments.

Companies are also required to pay advance tax on the total estimated income for the financial year, and failure to do so may attract penalties and other legal actions as well. The taxation and other rules differ for domestic and foreign companies, and their structure plays a major role in deciding the benefit criteria and exemptions, and deductions available. Reach out to TaxDunia to take your business to new heights.