Payment and Determination of Tax

Chapter XII (S.185-189) enforces the Government’s cashless economy agenda through the Income-tax Act. These five sections impose mandatory banking channel requirements on loans, deposits, advances, and high-value receipts. Non-compliance triggers penalties under Chapter XXIII (up to 100% of the amount) and can result in the amount being treated as unexplained income under Chapter VI. These provisions are the enforcement backbone of India’s financial inclusion and anti-money-laundering policies.

Exemptions (S.185(2)): Government, banking companies, post office savings banks, cooperative banks, statutory corporations, and government companies are exempt. Also exempt: transactions where both parties have only agricultural income with no taxable income (S.185(3)). Agricultural cooperative banks get a higher Rs.2 lakh threshold (S.185(4)).

S.186 — Rs.2 lakh cash receipt limit: No person shall receive Rs.2 lakh or more in cash in aggregate from a person in a day, in a single transaction, or in transactions relating to one event/occasion. This covers all cash receipts (not just loans/deposits). Exemptions: government, banks, post offices, cooperative banks, and notified persons.

S.187 — Mandatory electronic payment: Businesses with turnover exceeding Rs.50 crore must provide electronic payment acceptance facility (e.g., card terminals, UPI, net banking). This promotes the digital payments ecosystem.

Chapter XIII is the rate-determination chapter of the Act. It contains the entire architecture of tax rates for all categories of assessees and all types of income. This is the chapter that determines HOW MUCH tax is actually payable after total income has been computed. It is divided into five parts: Part A — Special cases (S.190-195); Part B — Capital gains rates (S.196-198); Part C — New tax regime for individuals, companies, and cooperatives (S.199-205); and the implicit Part D covering MAT and AMT provisions. This is arguably the most consequential chapter for tax planning.

13.2.1 Section 194 — Six Special Rate Categories

These three sections contain the post-23.07.2024 capital gains rate structure — one of the most significant tax reforms of recent years:

The S.197(3) grandfathering formula: For land/building acquired before 23.07.2024 by resident individuals/HUFs ONLY: compute tax BOTH ways — (A) at 12.5% on unindexed gains, and (B) at 20% on indexed gains. The EXCESS of A over B is ignored. Effect: the assessee pays the LOWER of the two. This protects taxpayers who acquired property decades ago and would have had substantial indexation benefit under the old regime.

S.198 — Rs.1.25 lakh exemption: Only the LTCG exceeding Rs.1,25,000 from listed equity/equity MF/business trust is taxable at 12.5%. This exemption is per assessee per year (not per transaction). The S.156 rebate does NOT cover S.198 tax (S.198(7)). STT must be paid on acquisition AND transfer for shares; only on transfer for MF/BT units (S.198(1)(c)). IFSC transactions in foreign currency are exempt from the STT condition.

Part C contains the most significant structural reform in the 2025 Act — the new tax regime architecture for individuals, companies, and cooperatives:

13.4.1 Section 202 — New Individual/HUF Regime (DEFAULT)

Deductions NOT available in new regime (S.202(2)): Most Chapter VIII deductions are denied (except employer NPS S.124(1)-(2), Agnipath S.125(2), additional employees S.146). Multiple Schedule III exemptions (HRA, LTA, etc.) denied. S.46 investment-linked deduction denied. S.48/49 additional depreciation denied. S.45(3) scientific research denied. House property loss set-off against other heads denied. Most exemptions under any other law also denied (S.202(2)(c)).

Opt-out mechanism (S.202(4)): Business assessees: opt out before return due date; once exercised, applies to all subsequent years; can be withdrawn only ONCE; after withdrawal, never eligible again (unless business ceases). Non-business assessees: opt out year by year with return. This asymmetry means salaried individuals can switch annually, but business owners are effectively locked in.

13.4.2 Corporate Tax Regimes (S.199-201, 203-204)

Common conditions (S.205): For S.201/204 manufacturing companies/cooperatives: must not be formed by splitting/reconstruction; must not use previously used machinery (>20%); must not use hotel/convention centre that claimed S.80-ID deduction; must be engaged ONLY in manufacturing (not software development, mining, conversion of petroleum products, printing of books, production of cinematograph films, or bottling of gas). Anti-avoidance (S.205(4)): if related-party transactions inflate profits, AO recomputes at arm’s length.

The irrevocability principle: Options under S.199, 200, 201, 203, and 204 are all irrevocable once exercised (with limited exceptions). Under S.200, the option becomes invalid if conditions are breached, and the assessee reverts to the normal regime. Under S.201, the option can migrate to S.200 if conditions are violated. This irrevocability creates a significant planning decision for companies: the lower rate comes with permanent surrender of various deductions and incentives. Companies with substantial accumulated losses attributable to forgone deductions must carefully model whether the rate reduction compensates for the lost deductions.

MAT and AMT interaction: Companies opting for S.200 (22%) or S.201 (15%) are NOT subject to MAT under S.206. Similarly, cooperatives opting for S.203 (22%) or S.204 (15%) are outside AMT/MAT. Individuals under S.202 (new regime) are also outside AMT. This simplification is one of the key advantages of the new rate regimes: no parallel computation of book profit or adjusted total income is required. However, companies NOT opting for these sections remain subject to MAT at 15% of book profit (S.206).

Surcharge and cess: The effective rates are higher than the headline rates due to surcharge and education cess. For S.200 companies: 22% + 10% surcharge + 4% cess = 25.168%. For S.201 manufacturing companies: 15% + 10% surcharge + 4% cess = 17.16%. For S.202 individuals, the new regime rates already incorporate graduated surcharges at higher income levels. The surcharge rates are specified in the Finance Act / Schedule I of the Act and vary by income level and entity type.

Transition from old to new regime: When a company transitions to S.200 or an individual defaults to S.202, any losses or depreciation from earlier years that were attributable to surrendered deductions are deemed to have been given full effect to (S.200(3), S.202(3)). This means those losses are permanently extinguished — they cannot be carried forward or set off in any subsequent year. This is the ‘cost’ of the new regime: lower rates but with forfeiture of past incentive-linked losses.

[End of Chapters XII and XIII. Chapter XIV: Minimum Alternate Tax and Alternate Minimum Tax follows.]