By Manu Rao | Updated March 2026
India offers two parallel income tax regimes. The Old Regime keeps higher rates but allows dozens of deductions and exemptions. The New Regime (introduced in Budget 2020, made default from FY 2023-24) offers lower rates but strips out most deductions. For foreign investors with Indian companies, this choice affects both personal tax (for India-based directors) and corporate tax strategy.
Quick Comparison Table — Individual Tax Rates (FY 2025-26)
| Income Slab | Old Regime Rate | New Regime Rate |
|---|---|---|
| Up to INR 2.5 lakh (Old) / INR 3 lakh (New) | Nil | Nil |
| INR 2.5-5 lakh (Old) / INR 3-7 lakh (New) | 5% | 5% |
| INR 5-7 lakh (Old) / INR 7-10 lakh (New) | 20% | 10% |
| INR 7-10 lakh (Old) / INR 10-12 lakh (New) | 20% | 15% |
| INR 10-12.5 lakh (Old) / INR 12-15 lakh (New) | 30% | 20% |
| INR 12.5-15 lakh (Old) / Above INR 15 lakh (New) | 30% | 30% |
| Above INR 15 lakh | 30% | 30% |
Plus 4% health and education cess on total tax, and surcharge for income above INR 50 lakh.
Corporate Tax — Section 115BAA vs Standard Rates
| Criterion | Standard Rate (Old Regime) | Section 115BAA (New Regime) |
|---|---|---|
| Tax Rate | 25% (turnover up to INR 400 Cr) or 30% | 22% flat |
| MAT Applicable | Yes — 15% under Section 115JB | No MAT |
| Deductions Available | Section 80-IA/80-IB (industrial undertakings), Section 35 (R&D), Section 32 (depreciation including additional depreciation), Section 10AA (SEZ units) | Most deductions forfeited — only Section 80JJAA (new employment) available |
| Effective Rate (incl. surcharge + cess) | ~26% to ~34.9% depending on turnover and surcharge bracket | ~25.17% |
| Opt-in Requirement | Default for companies not filing Form 10-IC | Must file Form 10-IC before the due date of the return for the first year of opting in |
| Reversibility | N/A | Irrevocable — once opted in, cannot switch back to old regime |
For Companies — When Section 115BAA Makes Sense
Most newly incorporated companies with foreign investment should opt for Section 115BAA. Here is why:
A new company registering in India is unlikely to have accumulated tax incentives. It does not have SEZ unit exemptions (those are grandfathered for existing units). It does not have investment-linked deductions under Section 80-IA. It probably does not have significant R&D expenditure qualifying for weighted deduction under Section 35(2AB).
The calculation is straightforward. If your company has no significant deductions or exemptions to claim, the old regime taxes you at 25-30% with MAT as a floor. The new regime taxes you at 22% with no MAT. The new regime wins.
When to Stay on the Old Regime
Keep the old regime if your Indian company:
- Operates in a Special Economic Zone and claims Section 10AA exemption (100% exemption for first 5 years, 50% for next 5 years)
- Has R&D expenditure qualifying for weighted deduction under Section 35(1)(ii) or 35(2AB)
- Claims additional depreciation under Section 32(1)(iia) on new plant and machinery
- Has significant brought-forward MAT credit (available for 15 years) that would be lost on switching
Run the numbers with your CA before opting into 115BAA. The opt-in is irrevocable — once you file Form 10-IC and switch, you cannot go back. Ever.
For Individual Directors and Employees
Foreign directors receiving salary from the Indian company are taxed as individuals. If the director qualifies as a tax resident (present in India for 182+ days or meets the 60-day + 365-day test), their Indian salary income is taxed under individual slab rates.
Old Regime Advantages (Individual)
The old regime allows deductions that the new regime eliminates:
- Section 80C: Up to INR 1.5 lakh deduction for life insurance, PPF, ELSS, tuition fees, home loan principal
- Section 80D: Health insurance premium deduction (up to INR 25,000 self, INR 50,000 for senior citizen parents)
- Section 24(b): Home loan interest deduction up to INR 2 lakh for self-occupied property
- HRA exemption: Under Section 10(13A) — significant for employees paying rent in metros
- LTA: Leave Travel Allowance exemption under Section 10(5)
- Standard deduction: INR 50,000 (available under both regimes from FY 2023-24 onwards)
New Regime Advantages (Individual)
- Lower slab rates across most income levels
- Higher basic exemption (INR 3 lakh vs INR 2.5 lakh)
- No need to track or document deduction claims
- Standard deduction of INR 75,000 (increased from INR 50,000 in Budget 2024 for new regime)
- Rebate under Section 87A: No tax if income is up to INR 7 lakh (new regime)
The Crossover Point
If your total deductions under the old regime exceed approximately INR 3.75-4 lakh (beyond the standard deduction), the old regime likely produces lower tax. Below that threshold, the new regime's lower rates give a better result.
For a foreign director who does not have Indian home loans, Indian life insurance, or PPF investments — the new regime is almost always better. They simply do not have the instruments to claim old-regime deductions.
DTAA Implications
The regime choice does not affect DTAA benefit eligibility. A foreign director can claim treaty benefits (like reduced withholding on salary under the dependent services article) regardless of which regime they are on. The DTAA operates as an overlay — it caps India's taxing right, and the domestic regime determines the actual computation within that cap.
For foreign companies receiving dividends, royalties, or fees for technical services from their Indian subsidiary — the withholding tax rates are determined by DTAA or domestic law (whichever is lower), not by the company's choice of old or new regime.
Practical Scenarios
Scenario 1: New Indian Subsidiary with US Parent
A US company incorporates a Private Limited subsidiary in India. The subsidiary has 15 employees, annual revenue of INR 5 crore, no SEZ operations, no significant R&D. It should opt for Section 115BAA immediately. Effective tax rate: ~25.17%. No MAT calculation needed.
Scenario 2: Foreign Director Drawing INR 30 Lakh Salary
A UK national serves as a director of the Indian subsidiary and is present in India for 200 days. They are tax resident. Under old regime with INR 2 lakh in deductions: tax of approximately INR 6.6 lakh. Under new regime: tax of approximately INR 5.1 lakh. New regime wins by INR 1.5 lakh.
Scenario 3: Indian Subsidiary with SEZ Unit
A subsidiary operates an IT delivery center in a Special Economic Zone. Section 10AA exempts 100% of export profits for the first 5 years. If they switch to Section 115BAA, they lose this exemption. On INR 10 crore of export profits, the SEZ exemption saves INR 2.5 crore+ in tax. Old regime is clearly better — until the 10-year exemption window expires.
How to Choose
Choose New Regime (115BAA for Companies) if:
- Your company is newly incorporated with no legacy deductions
- You have no SEZ operations
- You prefer a simple, predictable tax rate
- You want to avoid MAT calculations
Choose Old Regime if:
- Your company has significant SEZ/R&D deductions
- You have accumulated MAT credit you want to use
- Your deductions and exemptions reduce taxable income enough to beat the 22% rate
The regime choice is one of the first tax decisions a new Indian entity makes. Get it right, and you save money every year. Get it wrong under 115BAA, and the mistake is permanent.
Need help structuring your India entity's tax position? Contact Beacon Filing — we work with CAs who specialize in foreign-invested company taxation.