Entity Setup
Entity Setup in India: Choosing the Right Structure under the New Income-tax Act, 2025
With India’s new Income-tax Act, 2025 now in force for all tax years starting 1 April 2026, selecting the optimal business entity type is more crucial than ever — this article breaks down how different structures fare under the new law.
By NomadicTax Research Team • 5 min read • August 31, 2026
## Overview of India’s New Income-tax Act, 2025
The Income-tax Act, 2025 replaced earlier legislation for tax years commencing **1 April 2026**. While existing obligations (like Assessment Year 2026-27) still follow the old law, all future income (from Tax Year 2026-27 onwards) will be governed by the new Act. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/node/11724?utm_source=openai))
For anyone setting up an entity now, this means anticipating not just current compliance but how the structure interacts with provisions like minimum tax, surcharge, foreign income, and dividend rules under the 2025 law.
## Key Entity Types Compared
| Entity Type | Key Advantages | Potential Challenges under the New Law |
|-------------|------------------|-----------------------------------------------|
| **Private Company / LLC-type firm (Indian resident)** | Access to corporate tax rates, ability to distribute dividends (subject to dividend tax rules); clear governance structure | Higher minimum tax liability for certain companies; stricter rules on dividend declaration and shareholder rights under domestic company definition in new Act. For example, domestic companies need to “declare and pay dividends (including preference shares) payable out of income” under prescribed arrangements. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/sites/default/files/2026-03/Finance_Bill.pdf?utm_source=openai)) |
| **Partnership / LLP / Proprietorship** | Simplified structure; less governance burden; flexible profit-sharing; potentially favorable for smaller businesses | Income from business/profession now tightly scrutinized under withholding rules, presumptive income rules, and applicable minimum thresholds; less scope for deferring tax; audit obligations for larger turnover businesses. |
| **IFSC-based Unit / Special Economic Zone (SEZ)** | Preferential TDS/TCS/withholding reliefs (in some cases) and other incentives; possibly reduced compliance burden in special zones; notification No. 75/2026 for Ship Lease Rent non-deduction is a case in point. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/latest-news/11875?utm_source=openai)) | Incentives may be specific to activity; tax non-deduction or reliefs often have narrow eligibility; profit repatriation and transfer pricing rules still apply; must maintain records to show eligibility. |
## Planning Principles When Setting Up
- **Match entity type to expected revenue & profit patterns**: If you expect high turnover with lower margin, a company may face higher minimum tax, so proportions of dividend vs retained profits matter.
- **Consider residence & foreign income**: New rules around how foreign tax credit applies (e.g. in Sri Lanka under its Amendment Act) show you must plan to claim and document foreign tax; avoid double taxation through treaty use. (See also Sri Lanka case below.)
- **Plan for withholding tax impacts**: Cross-border services, content creation, royalties, etc., now more likely to have source-based withholding, sometimes before treaty relief. Keep compliance, contracts & documentation tight.
- **Think about exit / profit distribution**: Under some new rules, distributions or dividends require adhering to prescribed declaration & payment norms; failing those may lead to adverse tax treatments.
## Actionable Checklist
1. **Project your income & profit for first 2-3 years** — compare tax under company vs LLP vs sole proprietorship.
2. **Map foreign ties** — any foreign content creators, service recipients, royalty or digital income? Research DTAA (Double Taxation Avoidance Agreements).
3. **Choose location carefully** — look at whether IFSC/SEZ incentives apply, and whether your activity qualifies.
4. **Draft constitutive documents** — shareholding, profit distributions, board/partner agreements to align with new laws.
5. **Stay flexible** — laws evolve; ensure entity allows changes (e.g. converting partnership to company) without huge cost.
## Example
Suppose Mr. A is a software service exporter, expected turnover ₹2 crores/year, with modest profits. Entities considered:
- If he sets up a **corporation**, he may get corporate tax rates (~25-30%), but minimum tax and surcharges might bite; dividends to shareholders will require promoter declarations.
- If he continues as a **proprietorship / LLP**, he may avoid minimum corporate tax and dividend complications, but loses advantages around reinvestment and clarity for foreign investors.
- If located in an IFSC, certain non-deductions (such as TDS on ship-lease rent) and withholding advantages could favour setting up unit there. Use Notification 75/2026. ([incometax.gov.in](https://www.incometax.gov.in/iec/foportal/latest-news/11875?utm_source=openai))
## Conclusion
Choosing the right entity under India’s 2025 law means balancing long-term business goals, profit expectations, foreign linkages, and regulatory incentives. A well-structured entity can reduce tax costs, simplify compliance, and help access international markets smoothly.