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The tax rate a foreign company pays in India is not assigned by default. It is the direct result of decisions made before the business files its first return. The numbers involved are not marginal. A foreign branch paying tax on royalty income can face an effective rate exceeding 52%, while a new manufacturing subsidiary operating under the right regime pays approximately 17.16% on the same statute.
That range is what this piece unpacks. The corporate tax structure in India differentiates by entity type, income nature, and the regime a company elects. This blog walks through each of those variables, what they mean for a foreign group entering India, and why the decisions that determine your corporate tax rate need to be made at the setup stage, not revisited later.
The most consequential tax decision a foreign company makes when entering India is whether to operate through a branch office or incorporate a local subsidiary. The corporate tax structure in India treats these two structures under entirely different frameworks, and the rate difference is not marginal.
A branch of a foreign company is taxed as a foreign company under the Income-tax Act, 1961. General business income attributable to Indian operations is taxed at a base rate of 35%. After surcharge at 2% for income between INR 1 crore and INR 10 crore, or 5% for income exceeding INR 10 crore, and a 4% Health and Education Cess, the effective rate on business income falls between approximately 36.4% and 38.2%.
A locally incorporated Indian subsidiary, regardless of who owns it, is treated as a domestic company under the same Act. It can access concessional tax regimes that are not available to a foreign branch. For most foreign groups whose Indian operations involve services, technology, or manufacturing, the subsidiary structure produces a materially lower effective burden under the corporate tax structure in India. The branch format is more appropriate where the presence is temporary, project-specific, or where regulatory constraints in a particular sector limit the subsidiary option.
This is not a decision to revisit after incorporation. It needs to be settled before the legal structure is finalised.
The corporate income tax in India applies differently to a foreign company depending on how it operates here. A branch or permanent establishment is taxed as a foreign entity. The rates are higher, and the structure is less flexible.
For Assessment Year 2026-27, general business income from a permanent establishment or business connection is taxed at 35% on net income. Surcharge and cess push the effective rate to between 36.4% and 38.2%.
The position on royalties and fees for technical services is more punishing. Tax is levied at 50% on the gross amount, with no allowance for expenses. After surcharge and cess, the effective rate exceeds 52% under domestic law. That figure can fall where a tax treaty applies.
| Income Type | Base Rate | Surcharge | Cess | Approx. Effective Rate |
|---|---|---|---|---|
| General business income (branch / PE) | 35% | 2% / 5% | 4% | ~36.4% to 38.2% |
| Royalties and fees for technical services | 50% | 2% / 5% | 4% | ~52% and above |
Source: Income Tax Department of India, notified slabs for AY 2026-27
The rates above reflect domestic law. A double-taxation avoidance agreement, where one exists, can reduce the applicable rate. Treaty positions are covered in a later section.
A locally incorporated subsidiary is classified as a domestic company. Under the corporate tax structure in India, that opens up three rate options that are not available to a foreign branch. The right one depends on the nature of the business.
Companies whose prior-year turnover did not exceed INR 400 crore pay tax at a base rate of 25%. Surcharge kicks in at 7% on income between INR 1 crore and INR 10 crore, and at 12% on income above that. After 4% cess, the effective rate falls between 26% and 29%.
Domestic companies that meet the eligibility conditions can opt to pay corporate income tax in India at 22% on total income. A 10% surcharge applies on income above INR 1 crore, plus 4% cess, putting the effective rate at approximately 25.17%.
Opting in comes with a condition. Most specified deductions and exemptions under the Act must be surrendered. For service subsidiaries, technology businesses, and shared-service centres, that is generally a workable trade-off given the lower rate.
New manufacturing companies incorporated after 1 October 2019 that commenced production before 31 March 2024, or a later date as notified, qualify here. The base rate is 15%. With a 10% surcharge on income above INR 1 crore and 4% cess, the effective rate comes to approximately 17.16%. That is the lowest rate available within the corporate tax structure in India. Foreign manufacturers, contract producers, and export units building production capacity in India should assess eligibility for this regime before anything else.
| Regime | Base Rate | Surcharge | Cess | Approx. Effective Rate |
|---|---|---|---|---|
| Standard (turnover up to INR 400 crore) | 25% | 0% / 7% / 12% | 4% | ~26% to 29% |
| Section 115BAA | 22% | 10% if income exceeds INR 1 crore | 4% | ~25.17% |
| Section 115BAB | 15% | 10% if income exceeds INR 1 crore | 4% | ~17.16% |
Source: Income Tax Department of India, notified slabs for AY 2026-27
One timing point that cannot be overstated. Elections under Section 115BAA and Section 115BAB must be filed by the due date for the first return under the chosen regime. There is no revision mechanism once the election is submitted. This is a decision that needs to be made before filing starts, not after the company has already been operating for a year and the window has closed.
Running parallel to the regular corporate tax computation, the Income-tax Act maintains a Minimum Alternate Tax regime under Section 115JB. MAT ensures that companies which reduce taxable income substantially through deductions, depreciation, and incentives still contribute a minimum level of tax relative to their actual financial performance.
MAT is computed at 15% on book profit, the profit figure in the audited financial statements, plus applicable surcharge and cess. Where regular tax liability falls below the MAT figure, MAT becomes the amount payable for that year. The excess paid over regular tax is carried forward as a MAT credit, offsettable against future regular tax liability for up to fifteen years.
For foreign-owned subsidiaries that have elected into Section 115BAA or Section 115BAB, MAT does not apply. The exemption is statutory. No MAT computation, no credit tracking, no exposure. For capital-intensive operations, or those relying on incentives in their early years, this exemption carries real financial weight. A single regime election removes both the MAT variable and reduces the base rate in one step.
India has concluded double-taxation avoidance agreements with over 90 countries as of 2025-26. For a foreign company with an Indian subsidiary, these treaties directly affect the cost of cross-border payments between the Indian entity and its overseas group.
The areas where treaties most significantly modify the corporate income tax in India framework are:
Where a valid treaty applies, India taxes the income at the lower of the domestic rate and the treaty rate. Treaty benefits are not automatic, however. India’s more recent agreements incorporate limitation of benefits clauses and subject-to-tax conditions. The foreign entity claiming reduced rates must demonstrate genuine economic substance in its home jurisdiction, including real decision-making, adequate staffing, and operational presence. The General Anti-Avoidance Rule framework under Chapter X-A of the Income-tax Act applies further scrutiny to arrangements that lack genuine commercial rationale beyond the tax benefit.
The corporate tax structure in India requires that all transactions between an Indian entity and its overseas associated enterprises be priced at arm’s length. Contemporaneous documentation supporting that position must be maintained annually under Sections 92 to 92F of the Income-tax Act.
The Income Tax Department has historically maintained active audit scrutiny of foreign-owned subsidiaries in this area. Transfer pricing adjustments can significantly alter the effective corporate income tax in India burden and attract interest and penalties on top of the primary demand. For foreign groups with management fee arrangements, royalty payments flowing out of India, cost-sharing structures, or inter-company loans, transfer pricing compliance is a recurring annual obligation that needs to be built into the operating model from the first year of operations.
The corporate tax structure in India is a framework built on choices made early. The rate a foreign-owned operation pays is not assigned to it by default. It is the outcome of decisions around entity type, regime election, income characterisation, and how cross-border flows between India and the overseas group are structured and documented. Effective rates within the corporate income tax in India framework range from 17.16% for a new manufacturing subsidiary to over 52% on gross royalty income of a foreign branch. Both outcomes arise from the same statute. The difference between them is structure and timing.
Foreign groups that treat these decisions as integral to the setup process, rather than compliance details to be addressed later, consistently arrive at more efficient and sustainable tax positions. The framework is navigable. What it requires is engagement at the right stage, with the right level of specificity, before the structure is locked in.
