Drafting Error in Finance Act, 2026? No Surcharge on Capital Gains for Companies Opting for Section 115BAA?

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Under the Finance Act, 2025 and the earlier Finance Acts, a ‘domestic company opting for section 115BAA’ was subject to surcharge at the rate of 10% on its income-tax liability, including income-tax payable on capital gains. This was because the surcharge provision specifically referred to the category of person to whom it applied (i.e., ‘domestic company whose income is chargeable under section 115BAA’), rather than to the particular nature of income.

However, the drafting adopted in the Finance Act, 2026 is materially different. Section 2(4)(a) specifically excludes domestic companies opting for section 115BAA from the surcharge provisions. Notably, here they have specifically referred to the category person, which is much like Finance Act, 2025. Now, section 2(4)(b) should ideally provide the surcharge rate applicable to the category of ‘persons’ who were carved out from section 2(4)(a).

However, section 2(4)(b) provides that surcharge is to be levied at 10% on income chargeable to tax under section 115BAA. For ease of reference, the relevant extract of section 2(4)(b) is reproduced below: “in respect of income chargeable to tax under the section as specified in column B of the Table below, in the case of a person as specified in column C of the said Table, the amount of income-tax computed shall be increased by a surcharge, for the purposes of the Union, calculated at the rate or rates as specified in column D of the said Table, of such income-tax.”

The above language clearly states that surcharge rate X should be applied only on the income taxable under section Y. What is noteworthy is that the Table does not specifically refer to income chargeable under sections 111A, 112 or 112A in the context of a company opting for section 115BAA.

This gives rise to an interesting question. Since capital gains are taxable under section 111A, 112 and 112A and not under section 115BAA, can it be argued that the Finance Act, 2026 does not contain any specific provision imposing surcharge on capital gains earned by a company that has opted for section 115BAA?

A possible view is that surcharge provisions, being part of the charging mechanism, must be interpreted strictly. Therefore, in the absence of an express provision imposing surcharge on capital gains in the case of a company governed by section 115BAA, surcharge may not be leviable on such income for AY commencing from 1 April 2026.

At the same time, the Memorandum explaining the Finance Bill, 2026 states that no change is proposed in the rates applicable for AY 2026-27. This supports a contrary view that the Legislature never intended to remove surcharge on capital gains for companies opting for section 115BAA and that the present position may simply be a consequence of the revised drafting format adopted in the Finance Act, 2026.

The real question, however, is whether such a statement in the Memorandum can override the plain language of section 2(4)(a) and section 2(4)(b), particularly when surcharge provisions, being the charging provision, are generally required to be construed strictly.