Tax Rates for Co-operative Societies 2026-27: 22% and 15% Options (Income Tax Act 2025)

A resident co-operative society can choose a concessional tax rate under the Income-tax Act, 2025. Section 203 offers 22% on total income to any resident co-operative society that gives up most deductions. Section 204 offers 15% on manufacturing income to a new manufacturing society that was registered on or after 1 April 2023 and began production by 31 March 2024. Both are options, not defaults, and once exercised they cannot be withdrawn.

This guide explains what each option gives, what it takes away, who qualifies, and how the choice is made. It is based on the Act as amended by the Finance Act, 2026 (effective 1 April 2026, tax year 2026-27) and rule 25 of the Income-tax Rules, 2026. Surcharge, cess and the slab rates that apply when no option is exercised are outside these sections and are not covered here; the alternate minimum tax in section 206(2) is covered below.

What are the two concessional tax options for co-operative societies?

	Section 203	Section 204
Who can opt	Any co-operative society resident in India	A resident co-operative society engaged in manufacture or production of an article or thing
Rate	22% on total income	15% on most income; 22% and 30% on specified slices (see below)
Entry condition	Option exercised in the prescribed manner by the return due date	Registered on or after 1 April 2023; manufacturing started on or before 31 March 2024; conditions of section 205(2) met
Cost of opting	Most deductions are lost (see next section)	The same set of deductions is lost
Can it be withdrawn?	No (section 203(6))	No (section 204(2)(c))

What do you give up by opting for section 203 or 204?

Under both sections, total income is computed without:

• any deduction under Chapter VIII, except section 146 (additional employee cost) and section 150 (federal co-operative dividends); and
• the deductions or exemptions under the provisions listed in section 205(1)(a) to (g): sections 33(8), 45(3)(a)/(b)/(c), 46, 47(1)(a), 48, 49 and 144.

You also cannot set off a brought-forward loss or depreciation if it is attributable to those deductions (sections 203(1)(b) and 204(3)(b)). Such loss or depreciation is treated as already given full effect, so it is not available in any later year either (sections 203(3) and 204(4)).

The exception for dividends in section 203(7) and section 204(5) matters for societies that invest in other co-operatives. The deduction under section 149(2)(d)(ii), which covers dividends from investments with another co-operative society, stays available up to the amount of dividend the society distributes to its members at least one month before the due date for filing the return under section 263(1).

Two other points apply to section 203. A federal co-operative can still claim section 150 for company dividends: the amount must have arisen from an investment recorded in its books on or before 31 January 2026, and been distributed to members at least one month before the return due date. Section 150 does not apply to any tax year beginning on or after 1 April 2029. A unit in an International Financial Services Centre that has opted under section 203 can also claim section 147 if its conditions are met (section 203(4)).

How is a co-operative society taxed under section 203?

Section 203(1) charges 22% on the total income, computed as described above. Nothing else changes in the computation: normal income heads and the rest of the Act apply.

Worked example 1: section 203 without a dividend (tax year 2026-27). Assume a resident agricultural-marketing society has profits of Rs 30,00,000 and has opted under section 203. Without the option, a deduction under section 149(2)(a)(iii) could have covered the marketing profits. Under the option, it cannot.

Step	Amount (Rs)
Profits before any Chapter VIII deduction	30,00,000
Section 149 deduction allowed under the option	0
Total income	30,00,000
Tax at 22% (before surcharge and cess)	6,60,000

Whether this is better than the position without the option depends on the rates that apply otherwise, which are not set out in sections 203 or 204. The society's accountant has to run both numbers before opting.

Worked example 2: section 203 with the dividend relief in section 203(7) (tax year 2026-27). Assume a society has income of Rs 12,00,000, which includes Rs 2,00,000 dividend from an investment in another co-operative society. It distributes Rs 1,50,000 as dividend to its members more than one month before the return due date.

Step	Amount (Rs)
Income including inter-society dividend	12,00,000
Deduction under section 149(2)(d)(ii): lower of Rs 2,00,000 received and Rs 1,50,000 distributed	1,50,000
Total income (12,00,000 less 1,50,000)	10,50,000
Tax at 22% (before surcharge and cess)	2,31,000

What is the 15% rate for new manufacturing co-operative societies?

Section 204(1) splits the total income into four slices:

Slice of income	Rate
Total income other than the three slices below (mainly manufacturing or production income)	15%
Income that neither comes from nor is incidental to manufacturing, and has no specific rate elsewhere in this Part. No deduction or allowance for any expenditure is given against it.	22%
Short-term capital gains on a capital asset on which no depreciation is allowable	22%
Income deemed under section 205(4)	30%

Section 205(4) applies where the Assessing Officer finds that, because of a close connection with another person or otherwise, business between them is arranged so that the society earns more than ordinary profits. The excess is deemed to be the society's income and is taxed at 30%.

Worked example 3: section 204 (tax year 2026-27). Assume a society registered in June 2023 that began production in February 2024, and has opted under section 204. Its income:

Slice	Income (Rs)	Rate	Tax (Rs)
Manufacturing income	50,00,000	15%	7,50,000
Interest on surplus funds, unrelated to manufacturing	4,00,000	22%	88,000
Short-term capital gain on land (no depreciation allowable)	3,00,000	22%	66,000
Excess profit deemed under section 205(4)	1,00,000	30%	30,000
Total	58,00,000		9,34,000

The tax is before surcharge and cess. The Rs 4,00,000 of interest gets no expense set against it, so any cost of earning it is not deducted in this slice.

Who qualifies for the section 204 option?

Section 204(1), Table, column B, requires all of these:

• the society exercises the option as the Act and Rules prescribe;
• it was set up and registered on or after 1 April 2023;
• it started manufacturing or production on or before 31 March 2024;
• its total income is computed without the deductions listed above; and
• it meets every condition in section 205(2).

Section 205(2) adds that the business must not be formed by splitting up or reconstructing an existing business (with a limited carve-out for revival of certain undertakings under section 140(4)). The society must not use previously used machinery or plant, except permitted machinery imported from outside India, or previously used items worth no more than 20% of the total value of machinery and plant used. And it must not be engaged in any business other than manufacture or production of an article or thing, research in relation to it, or its distribution.

Under section 205(5), manufacture or production includes generating electricity. It does not include software development, mining, converting marble blocks into slabs, bottling gas into cylinders, printing of books, producing cinematograph films, or any other business notified by the Central Government.

Real-life example 1. Ravi's group registers a new cotton-processing society on 10 June 2023 and starts production on 15 February 2024 with new machines. It meets the registration and commencement tests. If it also meets section 205(2), section 204 is open to it. A second society registered on 20 March 2023 fails the registration test on its date alone, and a third that started production on 5 April 2024 misses the commencement date. Both can look at section 203 instead.

Real-life example 2. Meena is the accountant of a section 204 society. In year three it buys a used press that is 30% of the value of its machinery and plant. That breaks the 20% limit in section 205(2)(b)(ii). The section 204 option becomes invalid for that tax year and all later years, and the other provisions of the Act apply as if it had never been exercised (section 204(2)(d)).

How and by when is the option exercised?

The option is exercised in the manner prescribed, on or before the due date for filing the return under section 263(1) (sections 203(5) and 204(2)(a)). For section 204, that is the due date of the first of the returns of income for any tax year. Once exercised, the option applies to later tax years too.

The return due date under section 263(1)(c) depends on the society's profile:

Society's position	Due date
Section 172 (transfer pricing) applies	30 November
Accounts required to be audited under the Act or any other law, and section 172 does not apply	31 October
Business or profession income, accounts not required to be audited, section 172 does not apply	31 August
Any other case	31 July

If a society misses the date for exercising the option, the option is simply not available (section 203(5)). The Rules extracted for this article do not set out a separate form for the option, so check the prescribed manner before filing.

What happens if the society stops meeting the conditions?

Under section 203(2), if the society fails the requirements of section 203(1) in any tax year, the option becomes invalid for that year and all later years, and the ordinary provisions apply. Section 204(2)(d) says the same for failing the column B conditions under section 204. The society cannot pick the option back up later, because it cannot withdraw it and cannot re-exercise it once invalid.

Does the option affect depreciation?

Yes. Rule 25(2), Table Sl. No. 3, caps the depreciation allowance for any block of assets at 40% of the written down value for a resident co-operative society that has exercised the option under section 203(5) or 204(2). The block rates in Appendix I to rule 25 still apply where they are lower. Rule 25(1) sets out the calculation on written down value.

Does alternate minimum tax apply to a co-operative society?

It can, but only if the society did not opt under section 203(5) or 204(2). Under section 206(2)(a), where the regular tax of a person other than a company is lower than the alternate minimum tax (AMT), the adjusted total income is treated as total income and tax is charged at the AMT. For a co-operative society the AMT rate is 15% of adjusted total income (section 206(2)(b)(ii)(II)).

Adjusted total income is total income plus deductions claimed under any section of Chapter VIII-C other than section 149, and plus section 46 (reduced by depreciation otherwise allowable). So the section 149 deduction alone does not trigger AMT. The rule applies only to a society that claimed such a Chapter VIII-C deduction or section 46 (section 206(2)(c)), and not to one that opted under section 203 or 204 (section 206(2)(d)(i)).

Tax paid as AMT earns a credit for the excess over regular tax, carried forward up to the fifteenth following tax year and set off in a year when regular tax exceeds AMT (section 206(2)(e) and (g)). The society must also furnish an accountant's report in the prescribed form certifying the computation (section 206(2)(j)).

What are the common mistakes?

• Opting without running the numbers. The 22% rate comes with the loss of the section 149 deduction. A society with large deductible profits can end up worse off.
• Missing the option date. The window closes on the return due date under section 263(1). Late exercise is not valid.
• Treating the option as reversible. It cannot be withdrawn for the same or any other tax year.
• Distributing inter-society dividend too late. The section 149(2)(d)(ii) relief needs the distribution at least one month before the return due date.
• Using old machinery in a section 204 society. Crossing the 20% limit in section 205(2)(b)(ii) invalidates the option for all later years too.
• Carrying forward barred losses. Loss and depreciation attributable to the deductions given up are treated as already used and cannot be claimed later.

Where is this in the Act?

• Section 203: 22% option for resident co-operative societies, including 203(5) and (6) on exercise and 203(7) on dividends
• Section 204: 15% option for new manufacturing co-operative societies, with the Table in 204(1)
• Section 205: conditions, excluded deductions and the meaning of manufacture or production
• Section 149: deduction for co-operative societies; section 150: federal co-operative dividends; section 146: additional employee cost
• Section 206(2): alternate minimum tax, 15% for co-operative societies that have not opted
• Section 263(1): return due dates
• Rule 25(2), Table Sl. No. 3: depreciation cap for co-operative societies that opted

For the company version of these options, see corporate tax rates: 22% and the new manufacturing regimes.

How do CA firms keep track of co-operative society clients?

An option under section 203 or 204 is a one-time decision with a hard date and a permanent effect, so the record of when and how it was exercised matters in every later year. Finexo's practice management software lets a CA firm keep return due dates, audit status and client notes in one place and get reminded before dates pass. It does not compute tax or file returns for you.

This article explains the Income-tax Act, 2025 (as amended by the Finance Act, 2026) and the Income-tax Rules, 2026. It is general information, not tax advice. Confirm the position for a specific society with a qualified chartered accountant.