Section 2(18) Income Tax: Meaning of Substantial Interest of Public in a Company

As of September 30, 2025, Section 2(18) of the Income Tax Act, 1961 remains unchanged after the Finance Act, 2025. This section defines when a company is considered one in which the public are substantially interested. Such classification is important because it affects tax benefits like lower corporate tax rates, exemption from deemed dividend rules under Section 2(22)(e), and other incentives that promote public participation in company ownership.

The purpose of this definition is to ensure that tax benefits go to companies with broad public or institutional involvement. A company qualifies if it meets any of the conditions listed in the section, which relate to ownership, shareholding patterns, and official declarations.

Official Text of Section 2(18) of Income Tax Act, 1961

The following is the verbatim text of Section 2(18) from the Income Tax Act, 1961, incorporating corresponding references to the Companies Act, 2013, where the original Act cites the repealed Companies Act, 1956, for interpretive accuracy:

Unless the context otherwise requires, a company is said to be a company in which the public are substantially interested:

(a) if it is a company owned by the Government or the Reserve Bank of India or in which not less than forty per cent of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by that bank; or

(aa) if it is a company which is registered under section 25 of the Companies Act, 1956 (1 of 1956) [corresponding to Section 8 of the Companies Act, 2013]; or

(ab) if it is a company having no share capital and if, having regard to its objects, the nature and composition of its membership and other relevant considerations, it is declared by order of the Board to be a company in which the public are substantially interested:

Provided that such company shall be deemed to be a company in which the public are substantially interested only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration; or

(ac) if it is a mutual benefit finance company, that is to say, a company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act, 1956 (1 of 1956) [corresponding to Section 406 of the Companies Act, 2013], to be a Nidhi or Mutual Benefit Society; or

(ad) if it is a company, wherein shares (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by, one or more co-operative societies;

(b) if it is a company which is not a private company as defined in the Companies Act, 1956 (1 of 1956) [corresponding to the definition under the Companies Act, 2013], and the conditions specified either in item (A) or in item (B) are fulfilled, namely:—

(A) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 (42 of 1956), and any rules made thereunder;

(B) shares in the company (not being shares entitled to a fixed rate of dividend whether with or without a further right to participate in profits) carrying not less than fifty per cent of the voting power have been allotted unconditionally to, or acquired unconditionally by, and were throughout the relevant previous year beneficially held by—

(i) the Government, or

(ii) a corporation established by a Central, State or Provincial Act, or

(iii) any company to which this clause applies or any subsidiary company of such company if the whole of the share capital of such subsidiary company has been held by the parent company or by its nominees throughout the previous year.

Explanation.—In its application to an Indian company whose business consists mainly in the construction of ships or in the manufacture or processing of goods or in mining or in the generation or distribution of electricity or any other form of power, item (B) shall have effect as if for the words “not less than fifty per cent”, the words “not less than forty per cent” had been substituted.

Key Categories Explained

Government-Owned or RBI-Controlled Companies

These companies qualify when the Government or RBI owns them or holds at least 40% of their shares. This ensures alignment with public policy goals.

Non-Profit Companies

Companies formed for charitable, educational, or social purposes without profit distribution are included. This supports organizations serving public interests.

Companies Without Share Capital

CBDT can declare such companies as publicly interested based on their objectives and membership. The recognition applies only for specified assessment years.

Mutual Benefit Finance Companies

Nidhis and similar entities that promote community-based financial support qualify under this category.

Co-operative Society Shareholding

Companies where co-operative societies hold 50% or more voting power are considered publicly interested, reflecting their democratic structure.

Widely Held Public Companies

Non-private companies qualify if their shares are listed or if major holdings belong to government bodies or other qualifying companies. This ensures transparency and market regulation.

Why This Matters for Tax Planning

• Lower corporate tax rates for qualifying companies.
• Exemption from deemed dividend provisions under Section 2(22)(e).
• Better compliance status for companies with public participation.

Different Definitions under Income Tax relating to Companies:

Section 2(17): Company

Section 2(18): Substantial Interest of Public in Company

Section 2(22A)/ 2(23A) Income Tax: Domestic/ Foreign Company – Meaning

Section 2(26): Indian Company

Section 2(32): Substantial Interest of Person in Company

Section 2(36A): Public Sector Company