Section 204 Income Tax Act 2025: Who Qualifies for 15% Tax?
Section 204 provides an optional concessional tax regime for certain new manufacturing co-operative societies resident in India. The headline rate is 15%, but different rates apply to specified types of income and strict eligibility conditions must be met.
What does Section 204 provide?
Section 204(1), titled Tax on income of certain new manufacturing co-operative societies, permits a resident co-operative society engaged in manufacturing or production of an article or thing to opt for specified income-tax rates, provided it meets the statutory requirements. The section operates subject to Parts A, B and E and the relevant provisions of its Part of the Chapter, other than section 203.
The special regime corresponds broadly to the earlier section 115BAE of the Income-tax Act, 1961, but the applicable text is now contained in section 204 of the 2025 Act.
What tax rates apply under Section 204?
| Category of income | Rate | Statutory basis |
|---|---|---|
| Total income other than income in the following categories | 15% | Section 204(1), Table, clause (a) |
| Income neither derived from nor incidental to manufacturing or production, where no separate rate is prescribed under the relevant Part; no expenditure deduction or allowance | 22% | Clause (b) |
| Short-term capital gains on transfer of a capital asset on which depreciation is not allowable | 22% | Clause (c) |
| Income deemed under section 205(4) | 30% | Clause (d) |
These are the statutory income-tax rates specified in section 204. Applicable surcharge and health and education cess, where required by the relevant law, must be considered separately; the table is not a final effective-tax-rate calculation.
Who can claim the 15% manufacturing co-operative society tax rate?
Under section 204(1), the society must satisfy all of the following:
- It is a co-operative society resident in India.
- It is engaged in the business of manufacture or production of an article or thing.
- It was set up and registered on or after 1 April 2023.
- It commenced manufacturing or production on or before 31 March 2024.
- It exercises the option as required by section 204(2).
- It computes total income in accordance with section 204(3).
- It satisfies all applicable conditions of section 205(2).
Additional conditions under Section 205(2)
The business must generally not be formed by splitting up or reconstructing an existing business, subject to the specified exception. Restrictions apply to previously used machinery or plant, with statutory exceptions including the permitted 20% threshold. The society must not carry on business beyond manufacturing or production and research relating to, or distribution of, the articles or things it manufactures or produces. The Board may issue specified guidelines with the previous approval of the Central Government.
How and when must the option be exercised?
Section 204(2) requires the option to 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 for any tax year. Once validly exercised, the option applies to subsequent tax years and cannot subsequently be withdrawn.
If the society fails to fulfil the conditions specified in section 204(1), the option becomes invalid for that tax year and subsequent tax years. The other provisions of the Act then apply as though the option had not been exercised for those years.
Which deductions and losses are restricted?
Under section 204(3), total income is computed without deductions under Chapter VIII, except the provisions of section 146 or section 150, and without deductions specified in section 205(1)(a) to (g). The Finance Act, 2026 amendment to section 204(3)(a)(i) expressly includes section 150.
Set-off of earlier-year losses or depreciation attributable to these disallowed deductions is prohibited. Section 204(4) deems such loss or depreciation to have been fully given effect to, preventing deduction in later years.
Finance Act, 2026: Inter-co-operative dividend deduction
New section 204(5) modifies the restrictions for a society that has exercised the option: the deduction under section 149(2)(d)(ii) is available only up to the amount of dividend distributed to its members at least one month before the due date for filing its return under section 263(1). Eligibility for the deduction and the timing of distribution must be examined together.
Relevant statutory definitions and legal expressions
Section 2(32), as substituted by the Finance Act, 2026, covers a society registered under the Co-operative Societies Act, 1912, the Multi-State Co-operative Societies Act, 2002, or another law in force in a State or Union territory for registration of co-operative societies.
Residence is determined under the applicable provisions of the Income-tax Act, 2025; registration in India should not be treated as a substitute for examining the statutory residence test.
The society must carry on qualifying manufacture or production of an article or thing, subject to section 205(2). The definition of manufacture in section 2(69) addresses transformation of a non-living physical object, article or thing into a new and distinct object with a different name, character and use, or bringing into existence a new and distinct object, article or thing with a different chemical composition or integral structure.
The tax year is the period defined by the 2025 Act for assessment of income; references to earlier tax years and filing deadlines must be read in that statutory framework.
Practical illustrations
Example 1: Qualifying manufacturing income
A resident co-operative society registered in June 2023 began qualifying manufacturing in February 2024 and meets all other conditions. If it validly opts under section 204, qualifying income within clause (a) is subject to the 15% statutory rate, rather than a universal 15% rate on every category of income.
Example 2: Production started too late
A society registered in May 2023 begins manufacturing in April 2024. It does not satisfy the requirement to commence manufacturing on or before 31 March 2024 and cannot rely on section 204's concessional regime on those facts.
Example 3: Non-manufacturing income
A qualifying society has income unrelated and not incidental to manufacturing for which no separate rate is specified under the relevant Part. Such income falls under the 22% category, without deduction or allowance for expenditure under that clause.
Frequently asked questions
Is 15% tax available to every co-operative society?
No. Section 204 is restricted to qualifying new manufacturing co-operative societies that satisfy the registration, commencement, income computation and other conditions.
Can a society formed in 2025 opt for Section 204?
Ordinarily not if manufacturing commenced after 31 March 2024, because the section expressly requires commencement on or before that date.
Can the Section 204 option be withdrawn later?
No. Once exercised, it cannot be withdrawn for the same or subsequent tax years, subject to the statutory rules on invalidity where eligibility conditions cease to be satisfied.
Are dividend deductions allowed after the Finance Act, 2026?
Section 204(5) permits the specified deduction under section 149(2)(d)(ii) within the statutory limit linked to dividends distributed to members at least one month before the return-filing due date.
Which earlier law corresponds to Section 204?
Section 115BAE of the Income-tax Act, 1961, is the corresponding earlier provision.
Official law and further reading
Read the Income-tax Act, 2025, as amended by Finance Act, 2026 and the Income Tax e-Filing Portal. These official resources are cited in the article body and are not external navigation menu items.
Updated: 11 November 2026. This article is general legal information; eligibility depends on the facts and applicable statutory requirements.