Profit After Tax: Meaning, Formula, Tax and F&O Rules

Highlights:

• Profit After Tax (PAT) is net profit after current and deferred tax expense.
• A domestic company under Section 115BAA pays 22% plus 10% surcharge and 4% cess, an effective rate of 25.17%.
• From FY 2026–27, eligible Indian banks may pay dividends up to 75% of PAT, but the working limit is based on adjusted PAT and CET1 buckets.
• Exchange-traded F&O is non-speculative business income, taxed at slab rates in ITR-3, not at capital-gains rates.

Introduction

Profit After Tax (PAT) is the profit a business keeps after tax. In an Indian company’s profit and loss account it is the last earnings line before appropriations. Investors use it for EPS, dividend capacity and return on equity. Traders use the same idea when F&O profit is taxed as business income and added to other taxable income.

What is Profit After Tax (PAT)?

PAT, also called net profit, is Profit Before Tax minus income-tax expense. Tax expense is not only the cheque paid to the department. Under Ind AS, it includes current tax and deferred tax. That is why PAT can differ from “PBT × headline rate”.

PAT is what remains for dividends, buybacks, reserves, and reinvestment. It is not cash. Working capital, capex and timing differences can make cash profit higher or lower than PAT.

From FY 2020–21, Dividend Distribution Tax is abolished. The company pays dividends out of PAT; the shareholder is taxed on the dividend. PAT still sets how much can be distributed.

How to Calculate PAT

PAT = Profit Before Tax − Income Tax Expense

PBT is arrived at after operating costs, depreciation, interest, and exceptional items. A simple waterfall:

Revenue − operating expenses (before D&A and finance cost) = EBITDA (optional subtotal)

− depreciation/amortisation = EBIT (optional subtotal)

− finance costs ± exceptional items = PBT (Schedule III line)

− current tax − deferred tax = PAT / profit for the period (Schedule III line)

If there are non-controlling interests, EPS uses profit attributable to owners, not the full PAT line.

Corporate Tax Rates in India (AY 2026–27)

Tax expense depends on the regime the company is in.

*Includes surcharge and 4% health and education cess. Under 115BAA/115BAB, surcharge is a flat 10%. Under the normal regime, it is nil / 7% / 12% as income crosses ₹1 crore and ₹10 crore.

Section 115BAB is not open-ended. The company must have been incorporated on or after 1 October 2019 and commenced manufacturing on or before 31 March 2024. Newer factories generally use 115BAA. The option is exercised in Form 10-ID and is irrevocable.

Example: PBT of ₹10 lakh under 115BAA. Tax is 25.17% ≈ ₹2.52 lakh. PAT ≈ ₹7.48 lakh — not ₹7.80 lakh at a raw 22%.

LLPs and partnership firms do not get 115BAA. They are taxed at 30% plus cess (and 12% surcharge above ₹1 crore). A partner’s share is exempt under Section 10(2A).

PAT, Dividends and Indian Companies

For companies other than banks, Section 123 of the Companies Act, 2013 allows dividends from current or accumulated profits after depreciation, or from free reserves under tight limits (rate not above the three-year average, draw capped at 10% of paid-up capital plus free reserves, residual reserves at least 15% of paid-up capital).

Nifty 500 PAT margin was about 9.9% in FY25, with a wide sector spread (financials and healthcare in the mid-teens; energy much thinner). Listed-company dividends were around ₹5 trillion in FY25, with payout ratios typically in the low-30% range of PAT, well below any regulatory maximum, as firms retained more for growth.

Banks are different. Under RBI’s Directions effective FY 2026–27, aggregate dividend cannot exceed 75% of PAT. The binding number is often lower. Adjusted PAT equals reported PAT minus 50% of net NPAs as of 31 March. Permissible payout then follows CET1 / capital buckets: weak-capital banks pay nothing; stronger banks can pay a higher share of adjusted PAT, still inside the 75% PAT cap. Capital must remain above the regulatory minimum after the payout. Domestic systemically important banks face higher CET1 thresholds.

F&O Trading Income and Tax in India

Eligible derivatives on recognised exchanges are non-speculative business income under Section 43(5) (Section 66 of the Income-tax Act, 2025 from tax year 2026–27). They are not capital gains. Intraday equity without delivery is speculative business income. Delivery trades stay in the capital-gains code (listed-equity STCG 20%; LTCG 12.5% above ₹1.25 lakh).

F&O profit is added to other income and taxed at slab rates. Under the default new regime for FY 2025–26 / AY 2026–27:

Add 4% cess. Resident individuals with taxable income up to ₹12 lakh can get a Section 87A rebate of up to ₹60,000, which can wipe out tax in that band. Surcharge applies above ₹50 lakh.

Eligible expenses, brokerage, exchange fees, STT, GST on brokerage, data, internet, advisory, and depreciation on a computer used for trading, reduce taxable profit. Personal drawings do not.

File ITR-3 in the ordinary course. F&O losses can be set off against any income except salary, and carried forward for eight years against non-speculative business if the return is filed on time. Intraday speculative losses can be set off only against speculative income and carried forward for four years.

Turnover for audit and presumptive tax is not contract value. ICAI’s method is the sum of absolute profits and absolute losses on squared-off trades (plus option premium received if not already in the P&L). Tax audit under Section 44AB generally applies above ₹1 crore of turnover, or ₹10 crore if cash receipts and payments are within 5%, the usual F&O case. Section 44AD (deemed 6% of digital turnover, ITR-4) is available for F&O but not for speculative intraday; actual losses cannot be carried forward under 44AD. Advance tax applies if liability is ₹10,000 or more.

Example: F&O profit ₹18 lakh, expenses ₹1.5 lakh, taxable income ₹16.5 lakh, no other income, new regime. Tax ≈ ₹1,30,000 plus 4% cess ≈ ₹1,35,200. The same trader at ₹11 lakh taxable income can pay nil after 87A.

Why PAT Still Matters

PAT is the clean post-tax figure in the P&L. For companies, it feeds EPS, retained earnings, and the legal pool for dividends. For banks, it is the starting point for RBI’s adjusted-PAT cap. For F&O traders, the parallel number is taxable business profit after expenses, taxed at slabs plus cess, not at 12.5% LTCG.

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