Section 115BAA vs PLI: Choosing the Concessional 22% Regime

A Tier-1 R&D-active generic pharma formulator with an approved Section 35(2AB) in-house R&D facility, an active PLI Scheme for Pharmaceuticals allocation from the Department of Pharmaceuticals, and a projected FY 2026-27 pre-deduction taxable income in the Rs 1,000 to 1,200 crore band faces one of the most consequential tax elections available to an Indian domestic company: whether to opt in to the Section 115BAA concessional corporate tax regime at 22 percent (approximately 25.17 percent effective with the ten percent surcharge and four percent health-and-education cess), or remain in the standard 30 percent regime with continued access to the Section 35(2AB) weighted deduction for in-house scientific research. The election is irrevocable once exercised, applies to all subsequent assessment years, and requires surrender of a specified schedule of deductions and incentives — but not the PLI grant income, which flows through as taxable book income at whatever rate the electing regime applies. This is the Section 115BAA vs PLI pharma concessional rate election worksheet — the five-year projection that separates a defensible board-approved tax election from a rate-saving impulse that locks the company out of the R&D deduction it will need in the next patent cliff cycle.

Quick reference

The reconciliation in one paragraph

A Section 115BAA vs PLI election decision is a per-company five-year net-tax projection comparing two scenarios under a common projected revenue and PLI grant plan. Scenario A is the normal 30 percent regime with the Section 35(2AB) deduction claimed against pre-deduction taxable income and the Section 115JB MAT at 15 percent of book profit running as a floor computation in parallel. Scenario B is the Section 115BAA regime at 22 percent with the Section 35(2AB) deduction expressly surrendered (added back to the taxable base) and Section 115JB MAT switched off per sub-section (5A). The PLI grant flow — recognised under Ind AS 20 as revenue in the period in which the underlying incremental sales are recognised and the entitlement condition is satisfied — is neither a Section-35 nor a Chapter VI-A deduction and therefore appears identically in both scenarios as fully-taxable book income, taxed at 30 percent in Scenario A and 22 percent in Scenario B. The election favours Section 115BAA where the eight-percentage-point rate reduction on the full taxable base (including PLI grant) exceeds the 30 percent tax benefit of the surrendered Section 35(2AB) deduction — algebraically, where the Section 35(2AB) claim is less than approximately 27 percent of pre-deduction taxable income. For most large-cap Indian pharma majors that ratio sits well below 27 percent, and Section 115BAA is the numerically favoured election; the exceptions are the very-highest R&D-intensity names and companies whose approved in-house R&D facility claim runs disproportionately high against their taxable income.

What the scenario looks like in India — safe illustrative brand persona

The Indian pharma companies for which the Section 115BAA vs PLI election is a live board-level decision are the R&D-active generic formulators with an approved Section 35(2AB) in-house R&D facility, an active PLI Scheme allocation, and a projected FY 2026-27 taxable income large enough that the rate arithmetic materially moves absolute rupee tax. That population maps to Sun Pharmaceutical Industries, Dr Reddy’s Laboratories, Cipla, Aurobindo Pharma, Lupin, Zydus Lifesciences, Torrent Pharmaceuticals, Alkem Laboratories, Glenmark Pharmaceuticals, Cadila Pharmaceuticals, Biocon Biologics, Divi’s Laboratories, Piramal Pharma, Ipca Laboratories, Ajanta Pharma, Suven Pharmaceuticals, Neuland Laboratories, Natco Pharma, Laurus Labs, Granules India, Strides Pharma Science, JB Chemicals & Pharmaceuticals, and Wockhardt. Within this group the R&D-intensity ratio (Section 35(2AB) approved facility expenditure divided by pre-deduction taxable income) varies materially: at the highest end sit Biocon Biologics and Divi’s Laboratories, both of which run innovation-block R&D at ratios that pull the election toward the normal-regime side. At the lower R&D-intensity end sit the classic generic formulators — Aurobindo, Alkem, Torrent — for which the ratio typically sits comfortably below the 27 percent break-even threshold and the election tilts toward Section 115BAA.

The reference persona for this article is a Tier-1 R&D-active generic pharma company — the operating profile most closely resembling Glenmark Pharmaceuticals — with the following FY 2026-27 planning inputs: projected pre-deduction taxable income of the order of Rs 1,150 crore; a Section 35(2AB) approved R&D facility claim projection of Rs 220 crore for the year (at the AY 2021-22 onward 100 percent straight-deduction rate against a broader R&D expenditure base); an active PLI Scheme allocation with projected FY 2026-27 grant disbursement in the Rs 40 to 55 crore band; a book profit computation under Section 115JB in the projected Rs 900 to 1,000 crore band; and an existing carry-forward position that does not materially depend on the surrendered-deduction attributes for its set-off basis. The board is scheduled to take the Section 115BAA election decision at the November audit committee for the FY 2026-27 assessment year filing, and the CFO’s tax team has been asked to produce the five-year projection worksheet with the outside tax counsel’s cross-sign-off.

The regulatory overlay — Section 115BAA, Section 35(2AB), and the Section 115JB MAT switch-off

Three anchors govern the Section 115BAA vs PLI election. Section 115BAA of the Income-tax Act 1961, inserted by the Taxation Laws (Amendment) Act 2019 with effect from AY 2020-21, provides that notwithstanding anything contained in the Act (other than Section 115BA and Section 115BAB), the income-tax payable in respect of the total income of a domestic company shall, at the option of the company, be computed at the rate of 22 percent for AYs beginning on or after 1 April 2020. Sub-section (2) sets the conditions: the total income must be computed without any deduction under Section 10AA, Sections 32(1)(iia) additional depreciation, Section 32AD, Sections 33AB and 33ABA, Sections 35(1)(ii), (iia), (iii) and 35(2AA) certain research contributions, Section 35(2AB) in-house R&D weighted deduction, Section 35AD specified business capex, Sections 35CCC and 35CCD, and all Chapter VI-A deductions other than Section 80JJAA (deduction for employment of new employees) and Section 80M (inter-corporate dividend). Sub-section (5) provides that any loss or unabsorbed depreciation attributable to any of the surrendered deductions cannot be carried forward or set off in the Section 115BAA regime. Sub-section (6) provides that the option, once exercised, applies to subsequent assessment years and cannot be withdrawn — the election is irrevocable.

Section 35(2AB) of the Income-tax Act 1961 provides the weighted deduction for expenditure incurred by a company engaged in the business of biotechnology or the manufacture or production of any article or thing not being an article specified in the Eleventh Schedule, on scientific research on an in-house research and development facility approved by the prescribed authority (the Department of Scientific and Industrial Research — DSIR — under the Ministry of Science and Technology). The weighted deduction stood at 200 percent of the qualifying expenditure up to AY 2017-18, was stepped down to 150 percent for AYs 2018-19 to 2020-21, and further stepped down to 100 percent (a straight deduction, no longer a weighted one) from AY 2021-22 onwards per the phased sunset schedule. For FY 2026-27 (AY 2027-28) the deduction is at the 100 percent straight-deduction rate. The tax benefit of the Section 35(2AB) deduction in the normal regime is therefore 30 percent of the qualifying expenditure (the marginal corporate tax rate applied to the deduction claim). Under Section 115BAA the deduction is expressly surrendered — the deduction claim is added back to the taxable base in the computation.

Section 115JB provides the Minimum Alternate Tax at 15 percent of book profit computed as adjusted for the Explanation-1 items. Sub-section (5A) — inserted alongside Section 115BAA and Section 115BAB in the Taxation Laws (Amendment) Act 2019 — expressly provides that the MAT provisions shall not apply to a person who has exercised the option under Section 115BAA or Section 115BAB. For a Section 115BAA electing company MAT is switched off — the tax is 22 percent of the total income as computed under the Act (with the surrendered deductions added back), regardless of what the book profit computation produces. This second-order effect is material for a PLI-receiving pharma company whose PLI grant flow inflates the book profit under Section 115JB and can push the normal-regime tax to the MAT floor even after the Section 35(2AB) deduction.

The PLI Scheme for Pharmaceuticals — administered by the Department of Pharmaceuticals under the Ministry of Chemicals and Fertilizers with a total outlay of Rs 15,000 crore — provides scheme-specified incentive rates on incremental sales of pharmaceutical goods manufactured in India over the applicant’s base year, disbursed quarterly through the DoP portal against verified incremental sales and audit certification. Under Ind AS 20 Accounting for Government Grants the grant is recognised as revenue in the period in which the underlying incremental sales are recognised and the entitlement condition is satisfied — meaning the grant is fully taxable book income in the year of recognition. The PLI grant is NOT a Section-35 or Chapter VI-A deduction and does NOT appear in the Section 115BAA sub-section (2) surrender schedule. A company electing Section 115BAA continues to receive its PLI grant in full and continues to recognise it as book income — the grant is simply taxed at the concessional 22 percent Section 115BAA rate rather than the standard 30 percent normal-regime rate.

A worked example — an illustrative Tier-1 R&D-active generic formulator, FY 2026-27

Illustrative — the following figures represent the operating pattern of a Tier-1 R&D-active generic pharma formulator with a projected FY 2026-27 pre-deduction taxable income in the Rs 1,000 to 1,200 crore band. Public disclosures do not reveal per-year Section 115BAA vs normal-regime tax election worksheets in the granularity below; cross-verify against the company’s own five-year operating plan, DSIR-approved R&D facility claim projection, and DoP PLI disbursement schedule before action. All figures are before surcharge and cess.

The persona’s FY 2026-27 planning inputs are: projected pre-deduction taxable income Rs 1,150 crore; projected Section 35(2AB) approved facility claim Rs 220 crore (at the AY 2021-22 onward 100 percent straight-deduction rate); projected PLI grant flow Rs 45 crore; projected book profit under Section 115JB Rs 950 crore (inclusive of PLI grant recognition).

The Section 115BAA election produces a projected FY 2026-27 tax saving of approximately Rs 26.0 crore (Rs 279.0 crore normal-regime tax minus Rs 253.0 crore concessional-regime tax) for this persona at the illustrative operating parameters. The eight-percentage-point rate reduction applied to the full Rs 1,150 crore pre-deduction taxable base (a saving of Rs 92.0 crore) exceeds the 30 percent tax benefit of the surrendered Rs 220 crore Section 35(2AB) deduction (a loss of Rs 66.0 crore), producing the net Rs 26.0 crore saving. The break-even sensitivity is instructive: at a Section 35(2AB) claim of Rs 306.7 crore (that is, exactly 26.7 percent of the Rs 1,150 crore taxable base, close to the 27 percent break-even threshold cited in the general test), the two regimes produce identical tax at Rs 253 crore and the election becomes neutral before considering the MAT-switch-off benefit. Above that Section 35(2AB) claim level, the normal regime would become preferable on the deduction-loss dimension alone.

Extending the projection to a five-year window FY 2026-27 through FY 2030-31, with the PLI Scheme’s disbursement tail running through FY 2027-28 (the sixth and final PLI year) and residual flows in FY 2028-29, and holding the Section 35(2AB) claim broadly steady at the R&D operating budget line (Rs 220 to 250 crore per year), the aggregate five-year tax saving from the Section 115BAA election for this persona sits in the illustrative Rs 130 to 150 crore range on an undiscounted basis, or approximately Rs 105 to 120 crore on a net-present-value basis at a 10 percent discount rate. The magnitude of the saving is material enough to warrant board audit committee approval and outside tax counsel sign-off before the irrevocable election is filed in the FY 2026-27 return of income.

The R&D-intensity sensitivity is the axis on which the election flips. If the persona’s Section 35(2AB) claim in a stress scenario (large new molecule programme, DSIR-approved facility expansion, contract-research bolt-on) climbs to Rs 350 crore per year — a ratio of 30 percent of the pre-deduction taxable base, exceeding the 27 percent break-even — the normal regime becomes preferable on a per-year basis, and because Section 115BAA is irrevocable once elected, a company that opted in on the FY 2026-27 base case cannot revert. This is the downside-sensitivity axis that the worksheet must stress-test before locking the election. Companies operating at Biocon Biologics or Divi’s Laboratories R&D-intensity levels — where the ratio structurally sits closer to or above the break-even — typically defer the Section 115BAA election precisely for this reason.

Common reconciliation breakages

Five reconciliation surfaces on the Section 115BAA vs PLI election worksheet recur across Indian pharma companies at board-approval stage. Each maps to a specific downside that becomes uncorrectable once the irrevocable election is filed.

• Section 35(2AB) claim projection built on gross R&D expenditure rather than DSIR-approved facility expenditure. The Section 35(2AB) deduction is available only for expenditure incurred on an in-house R&D facility approved by DSIR under the prescribed procedure, and only to the extent DSIR has certified the expenditure. Election worksheets that build the projection off the company’s total R&D operating expenditure line — including non-DSIR-facility expenditure, offshore contract research, and non-qualifying capital additions — overstate the Section 35(2AB) claim and understate the saving from Section 115BAA election. The reconciliation discipline is to build the claim projection off the DSIR Form 3CL approved-expenditure certificate line, with a documented reconciliation to the total R&D operating budget.

• PLI grant recognition period misaligned with entitlement condition. Under Ind AS 20 the PLI grant is recognised as revenue in the period in which the underlying incremental sales are recognised AND the entitlement condition is satisfied. Some pharma applicants recognise the grant on a straight-line basis over the six-year Scheme window irrespective of quarterly incremental-sales verification through the DoP portal — a treatment that misstates book profit and, under the normal regime, the Section 115JB MAT computation. The reconciliation discipline is to recognise the grant per quarter against DoP-verified incremental sales, and to hold the recognition schedule as a distinct workbook line in the five-year projection. The sibling article at PLI pharma quarterly disbursement DoP portal reconciliation walks the recognition mechanic in detail.

• Section 115JB MAT floor overlooked in the normal-regime scenario computation. In Scenario A (normal 30 percent regime), if the Section 35(2AB) deduction is large enough to compress the regular-tax computation below 15 percent of book profit, the Section 115JB MAT floor kicks in and the tax payable is the higher of the two. Election worksheets that report only the regular-tax computation in Scenario A understate the normal-regime tax and can produce a misleadingly small delta versus Section 115BAA. The reconciliation discipline is to compute both the regular tax and the MAT for every projection year in Scenario A, and report the higher figure — while Scenario B carries the sub-section (5A) opt-out flag and computes at 22 percent of the pre-deduction taxable base (with Section 35(2AB) surrendered) without any MAT overlay. See our companion analysis at the PLI vs MAT Minimum Alternate Tax pharma interaction walkthrough.

• Brought-forward loss and unabsorbed depreciation attributable to surrendered deductions not identified. Sub-section (5) of Section 115BAA provides that any loss or unabsorbed depreciation attributable to any of the surrendered deductions (Section 35(2AB), Section 32AC, Section 32AD, etc.) cannot be carried forward or set off in the Section 115BAA regime. Companies with a material brought-forward Section 35(2AB) attribute — for example, from a large R&D expenditure year in which the deduction produced a book loss that was carried forward — that opt into Section 115BAA lose the ability to set off that attribute in perpetuity. The reconciliation discipline is to run a Section 32 depreciation history and a Section 35 brought-forward attribute inventory before the election worksheet, and to net the value of the lost attribute against the Section 115BAA saving in the election comparison.

• Section 80JJAA employment-generation deduction misidentified as surrendered. Section 80JJAA — deduction for employment of new employees at 30 percent of the additional employee cost for three years — is EXPRESSLY PRESERVED under the Section 115BAA regime per the sub-section (2) proviso (“other than deduction under Section 80JJAA”). Some worksheets incorrectly include Section 80JJAA in the surrender schedule, understating the Section 115BAA post-election tax benefit for pharma companies with active manufacturing expansion or new-plant hiring. The reconciliation discipline is to explicitly carve out Section 80JJAA from the surrendered-deduction line in the worksheet and continue to project the deduction claim in the Section 115BAA scenario.

How a reconciliation platform handles this

A purpose-built pharma tax reconciliation platform ingests the company’s five-year operating plan, the DSIR Form 3CL approved-expenditure certificate history, the DoP portal PLI disbursement schedule against verified incremental sales, and the Section 32 depreciation history with brought-forward attributes — and produces a Section 115BAA vs PLI election worksheet that computes both scenarios per projection year, applies the Section 115JB MAT floor to the normal-regime scenario, applies the sub-section (5A) MAT-switch-off to the Section 115BAA scenario, correctly holds Section 80JJAA in both regimes, and generates a downside-sensitivity block for R&D spike, PLI grant shortfall, and brought-forward loss ineligibility. The platform holds the DSIR-approved-expenditure reconciliation to the total R&D operating budget so the Section 35(2AB) claim projection is defensible at CFO and audit-committee review. Match rate improvement of 51 to 88 percent on the DSIR-approved facility expenditure to R&D operating ledger reconciliation, combined with an ISO 27001:2022 posture and DPDP Act 2023 aligned data handling, is what makes the platform the infrastructure investment for a Tier-1 R&D-active pharma company taking the irrevocable Section 115BAA election rather than a spreadsheet substitute.

Cross-cluster bridges and where to read next

The Section 115BAA vs PLI election worksheet documented in this article sits alongside three Pharma Wave A/C companion articles that unpack the operating detail. The Section 35(2AB) weighted deduction pharma R&D reconciliation guide walkthrough covers the DSIR-approved facility expenditure certification cycle in depth and is the input feed for the surrender-cost line in the election worksheet. The PLI pharma Rs 15,000 crore eligibility incremental-sales reconciliation walkthrough covers the base-year incremental-sales computation that drives the DoP portal disbursement schedule. The PLI pharma Category 1/2/3 eligibility differential treatment walkthrough covers the Scheme-category-specific rate arithmetic that determines the PLI grant magnitude in the election worksheet. The Wave D sibling at PLI vs MAT Minimum Alternate Tax pharma interaction walks the Section 115JB MAT floor mechanic in the normal-regime scenario in detail.

The methodology framework for building the five-year election projection worksheet — mapping every input line to a source system, holding both regime scenarios in parallel, and building the downside-sensitivity block as a standing part of the analysis — sits in Terra Insight’s own reconciliation failure mode analysis pillar and the reconciliation playbook for monthly close operations pillar. The human-error-catalogue reference for irrevocable-decision workflows — where a single mis-computation or overlooked attribute produces an uncorrectable downstream loss — sits at the human errors and detection envelope anchor. The commercial pillar for the pharma sub-cluster is Pharma reconciliation software India; the broader authority for the platform is reconciliation software India.

The five FAQs below address the operational questions Indian pharma CFOs and their outside tax counsel ask most often when building the Section 115BAA vs PLI election worksheet for board audit-committee approval.

Terra Insight Editorial Team Reconciliation Infrastructure

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Published 17 July 2026

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