Incentives for Doing Business in India

There are various incentives available to businesses depending on the economic activity, industry, location, and size of the firm.

Koushan Das

Manager, Business Intelligence

India offers tax relief at both the central and state level. Additional incentives are available to investors in specific sectors, while India’s special economic zones (SEZs) offer their own comprehensive tax relief. However, not all tax benefits offered are mutually inclusive.

Corporate tax incentives for eligible companies

The corporate income tax rate for new companies is 22 percent rate and for new domestic manufacturing is 15 percent.

The concessional tax regime (22 percent) for domestic enterprises is applicable only if they do not avail of specific tax incentives or deductions. (The effective tax rate for these domestic companies is around 25.17 percent inclusive of surcharge and cess.)

Those companies opting for the concessional corporate tax rate do not have to pay minimum alternate tax. India’s current effective tax rate brings it at par, on average, with leading Asian investment destinations and manufacturing hubs like China, Vietnam, Malaysia, Singapore, and South Korea.

Tax rates for foreign companies

A foreign company is liable to pay income tax at 35 percent of the average taxable Income.

Tax rate for partnership firms, including LLP or local authorities

A partnership firm, LLP, or a local authority must pay income tax at 30 percent of average taxable Income.

Tax incentive for capital expenditure on specified businesses

100 percent deduction of capital expenditure is allowed in the year when the commercial operations begin for the following specified businesses, including:

Setting up and operating cold chain facilities;
Setting up and operating warehousing facilities for storage of agricultural produce;
Setting up and operating an inland container depot, freight station; or
Warehousing facility for storage of sugar, beekeeping, and honey and beeswax production.

Incentives for Special Economic Zones (SEZs)

SEZs offer several incentives to foreign investors, such as ease of doing business, tax benefits, and favorable policies, which make it easier for them to invest in India. They include:

Tax benefits: SEZ developers and units qualify for tax exemptions on their profits and investments for a specific period, varying with the type of SEZ and the approval date. For the first five years, SEZ developers are entitled to a 100 percent income tax exemption on their profits, followed by 50 percent for the next five years. Likewise, SEZ units can avail themselves of a 100 percent income tax exemption on their profits for the first five years, a 50 percent exemption for the following five years, and a 50 percent exemption on reinvested profits for the next five years.
Customs duty exemption: SEZ units can import goods duty-free for their authorized operations and source goods from the Domestic Tariff Area without paying any duty.
Simplified procedures: SEZ units enjoy streamlined procedures for approvals, registrations, and certifications. They can benefit from a single-window clearance system that caters to all their needs.
Infrastructure support: SEZ developers can construct and maintain infrastructure facilities like roads, power, water, and communication networks within the SEZ, with government aid. SEZ units have access to top-notch infrastructure facilities within the zone.
Flexibility in employment: SEZ units are allowed to hire both domestic and foreign workers without any restrictions. They can also provide better compensation packages to their employees.

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Tax incentives in different Indian states

Foreign companies choosing where to set up in any of India’s states should note that each region has its own set of policies and incentive schemes. The applicability of incentives usually varies based on:

The state’s location;
The products that will be manufactured;
The scale of investment; and
The creation of jobs.

Social security agreements

India has concluded various Social Security Agreements (SSAs) to ease the social security obligations on cross-border/international workers. Incentives such as detachment, exportability of pension, totalization of benefits, and withdrawal of social security benefits are available.

India has signed SSA with 20 countries, including Belgium, Germany, Switzerland, Denmark, Norway, Luxembourg, France, South Korea, Netherlands, and Hungary to name a few.

SSAs offer three types of benefits for international workers and NRIs, namely: detachment, exportability, and totalization.

Detachment eliminates the need for workers to make social security contributions in the host country for a specific period (as stipulated by each SSA) if they continue to contribute to their home country's social security system. To avail of this benefit, the employee must present a 'Certificate of Coverage' (CoC) from their home social security authorities to the host country's authorities.
Exportability allows workers to receive social security benefits in either their home country or their host country without any difference in the value of the benefits. This enables workers to export their benefits from their host country to their home country or to beneficiaries after retirement or when their employment there ends.
Totalization takes into account the duration of an employee's work in a foreign country when determining their eligibility for benefits. The payment amount is prorated based on the length of time the employee worked in the foreign country.

Make-in-India initiative

This specific initiative aimed to build a strong manufacturing ecosystem, generate employment, and elevate India’s position in the global economy by focusing on design, innovation, and production across diverse sectors.

Key policies and initiatives under the Make in India directive

Production Linked Incentive (PLI) schemes

The PLI schemes were introduced to boost manufacturing across 14 key sectors with an allocation of INR 1.97 trillion (approximately US$23.3 billion). By August 2024, investments of INR 1.46 trillion had been realized, significantly increasing production and sales, which reached INR 12.50 trillion. Additionally, the schemes have generated approximately 950,000 jobs and contributed to export growth, surpassing INR 4 trillion, particularly in electronics, pharmaceuticals, and food processing.

The PLI schemes support multiple sectors, including:

Electronics manufacturing
Pharmaceuticals and medical devices
Automobiles and auto components
Specialty steel
Telecom and networking products
IT hardware
White goods (AC and LED)
Food processing
Textiles (man-made fiber and technical textiles)
Renewable energy (solar PV modules and advanced chemistry cell batteries)
Drones and drone components

Sector-specific achievements

Electronics manufacturing: India transformed from a net mobile phone importer to an exporter, with production surging from 58 million units in 2014-15 to 330 million units in 2023-24. Exports reached nearly 50 million units, and foreign direct investment (FDI) increased by 254 percent.
Pharmaceuticals and medical devices: India is now the third-largest pharmaceutical producer by volume, exporting 50 percent of its production. PLI schemes have enabled domestic production of essential bulk drugs like Penicillin G and advanced medical devices such as CT scanners and MRI machines, reducing import dependency.
Automotive industry: With an investment allocation of INR 259.38 billion (US$3 billion), the scheme has attracted INR 676.90 billion (US$8 billion), exceeding expectations. Over 85 companies have been approved, driving high-tech automotive production.
Renewable energy (Solar PV): A budget of INR 195 billion (US$2.31 billion) supports the goal of achieving 60 GW of integrated solar module production by 2025, enhancing energy self-sufficiency and employment opportunities.
Telecom and networking: India has substituted 60 percnet of telecom imports and has become a global supplier of 4G and 5G equipment. Increased manufacturing by global technology firms has strengthened India's role in global telecom infrastructure.
Drones and drone components: India's drone industry saw a seven-fold revenue increase, led by MSMEs and start-ups. The PLI scheme continues to foster investment, job creation, and advancements in drone technology.

PM GatiShakti infrastructure plan

Launched in 2021, PM GatiShakti is a national initiative designed to integrate key infrastructure sectors such as railways, roads, and airports. This program enhances logistics efficiency, reduces transportation costs, and promotes overall economic growth by connecting different networks under a unified planning framework.

Semiconductor ecosystem development

India aims to establish a self-reliant semiconductor industry through the ‘Semicon India’ program, with an investment of INR 760 billion (approximately US$8.99 billion). By September 2024, five semiconductor units received government support:

Micron Technology
Tata Electronics Private Limited (TEPL) in partnership with Taiwan’s PSMC
Tata Semiconductor Assembly and Test Pvt Ltd (TSAT)
CG Power in collaboration with Japan’s Renesas Electronics and Thailand’s Stars Microelectronics
Kaynes Semicon

National Logistics Policy (NLP)

Launched in September 2022, the National Logistics Policy (NLP) aims to enhance India's logistics infrastructure and strengthen its position as a global supply chain hub. The policy focuses on reducing logistics costs, improving efficiency in road, rail, air, and water transport, and integrating digital technologies for better tracking, customs management, and compliance. As of 2024, the Indian logistics sector is valued at US$317.3 billion, contributing 13-14 percent of GDP—higher than the global average due to infrastructure inefficiencies.

Key initiatives such as Bharatmala, Sagarmala, Udan, and Dedicated Freight Corridors have already lowered logistics costs to 8.35 percent of GDP, with a long-term goal of reducing this further to around 5 percent. These improvements aim to attract multinational companies looking for alternatives under the “China Plus One” strategy, bolstering India’s global trade competitiveness.

Industrialization and urbanization

The National Industrial Corridor Development Programme is India’s largest infrastructure initiative, designed to develop “Smart Cities” and advanced industrial hubs to drive manufacturing growth and planned urbanization. Recently, 12 projects with a combined investment of INR 286.02 billion (US$3.38 billion) have been approved, reinforcing India’s commitment to industrial expansion.

Special Economic Zones (SEZs) and Export-Oriented Units (EOUs)

SEZs are designated areas with distinct economic laws aimed at promoting business activities through incentives such as tax exemptions, simplified regulations, and superior infrastructure. Governed by the Foreign Trade Policy (FTP), EOUs focus on exports, benefiting from duty exemptions on imports and locally procured goods, GST exemptions on exports, and the ability to retain 100 percent of foreign exchange earnings. These advantages enhance financial flexibility and operational efficiency. SEZs are concentrated in states like Maharashtra, Gujarat, and Tamil Nadu.

Startup India

Launched in January 2016, Startup India fosters entrepreneurship, contributing to a thriving startup ecosystem. By December 2024, India ranked third globally in the number of startups, with over 156,041 DPIIT-recognized startups creating more than 1.5 million jobs. The initiative offers tax benefits, including a 100 percent deduction on profits for three consecutive years within a startup’s first decade (under Section 80-IAC of the Income Tax Act, 1961). Additionally, non-resident investments up to INR 100 million in startups are now tax-exempt. In a major boost, the 2024 Union Budget abolished angel tax for all investor categories, effective from FY 2025-26.

Tax reforms

The implementation of the Goods and Services Tax (GST) in July 2017 unified India's indirect tax system across all states and union territories, creating a seamless national market. This reform has simplified tax compliance, reduced cascading taxes, and enhanced the ease of doing business.

Unified Payments Interface (UPI)

India has emerged as a global leader in digital payments through UPI, which processes nearly 46 percent of the world's real-time transactions. Between January and November 2024, UPI transactions totaled INR 223 trillion, demonstrating widespread adoption. In October 2024, UPI recorded 16.58 billion transactions worth INR 23.5 trillion, setting a new monthly high. The platform's continued growth highlights its role in fostering digital financial inclusion and economic modernization.

Ease of Doing Business Reforms

India has introduced several regulatory improvements to enhance the Ease of Doing Business (EoDB). These include simplifying compliance processes such as application filings, renewals, inspections, and record submissions to reduce bureaucratic delays. Over 3,400 minor legal provisions have been decriminalized, and redundant laws have been repealed or amended to create a more business-friendly environment.

Digitization has also played a key role, with online platforms replacing manual paperwork, increasing transparency and efficiency. The introduction of PAN as a universal business identifier has streamlined regulatory approvals across government departments. As a result, India’s global Ease of Doing Business ranking improved from 142 in 2014 to 63 in 2020, making the country more attractive for investments and entrepreneurship.

Incentive applicable for FY 2025-26

Several schemes have been introduced to promote manufacturing in India, such as Manufacture and Other Operations in Customs Warehouse (MOOWR) and PLIs for several sectors. Further, the Government also introduced the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme to promote exports of goods from India;
Several customs duty-related changes have been introduced to motivate domestic manufacturers;
Faceless customs have been fully established, thereby enhancing the ease of doing business;
Micro, Small, and Medium Enterprises (MSMEs) can continue to avail of their non-tax benefits for a period of one to three years after they have achieved upward growth in investment and/or turnover, which will classify them in a higher category;
Concessional rate of 15 percent (plus surcharge and cess) on new manufacturing co-operative societies that meet the necessary requirements, starting from April 1, 2023; and
Startups in India can now carry forward and set off their losses incurred during the first ten years of incorporation, regardless of changes in shareholding, as long as all shareholders remain invested during the relevant period. The government has proposed to extend the previous time limit of seven years to ten years.