The government has created a number of profit-related deductions and incentives to encourage investment in various initiatives and areas. Taxpayers who are eligible to claim such deductions/incentives will become zero taxpayers or may end up paying marginal tax, regardless of their ability to pay regular tax.
On the other hand, the government need a steady inflow of tax revenue, as one of its key sources of funding for different welfare-related obligations. As a result, the concept of Minimum Tax was devised to prevent taxpayers from circumventing the goal of generating such incentives/deductions by removing them indirectly, as well as to ensure that tax is imposed on such zero tax/marginal tax businesses.
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What is Alternative Minimum Tax in India?
Minimum Alternate Tax (MAT) was introduced to make sure companies that show profits but pay very little tax due to deductions still pay a minimum amount of tax each year.
- Adjusted total income for MAT is computed by adding and deleting specific elements from the total income calculated using normal processes.
- Adjusted income is taxed at a lower rate than the ordinary tax rate.
- However, credit for MAT paid in previous years was permitted to be carried forward and set off in a later year when the normal tax payable was greater than the MAT.
The Alternative Minimum Tax (AMT), which was implemented for non-corporate taxpayers, is based on similar ideas. However, the application, method of computing adjusted income, exemption, reporting requirements, and so on differ from MAT.
What is The Applicability of Alternate Minimum Tax?
The concept of an Alternate Minimum Tax was initially pitched to corporations. However, the Finance Act of 2011 and its modifications in 2012 covered LLPs as well as individual and non-corporate taxpayers under the AMT’s ambit.
- AMT applies to individuals, Hindu Undivided Families (HUF), Associations of Persons (AOP), Bodies of Individuals (BOI), and Artificial Judicial Persons having a total adjusted income of more than Rs 20 lakh.
- Everyone else, regardless of socioeconomic status, excluding the individuals mentioned above.
- Individuals may only use AMT to deduct expenses from business revenues under Sections 80H to 80RRB, which include lodging facilities, real estate developments, small businesses, exporting, and infrastructure development.
- Under Section 10AA, Special Economic Zone (SEZ) units are eligible for a 50% to 100% deduction.
- Section 35AD permits enterprises who manufacture fertiliser or operate cold chain facilities to deduct 100% of their capital expenses.
What are the Basics of AMT?
As the name implies, AMT is a minimum tax that can be levied as an alternative to regular tax. The AMT rate is 18.5% of adjusted total income (plus any applicable surcharges and cess).
AMT is a tax levied on ‘adjusted total income’ in a fiscal year in which the tax on regular income is less than the AMT on adjusted total income.
As a result, taxpayers who are subject to AMT rules must pay it in addition to their regular tax. So, effectively, you pay more for the following:
- Normal tax on total income or AMT at 18.5% on adjusted total income (ATI).
- If the person is a unit in an International Financial Services Centre (IFSC) and receives all of their income in convertible foreign currency, the AMT rate is 9%.
Who is Exempt From AMT?
AMT requirements do not apply to the following taxpayers whose yearly income is less than Rs. 20,00,000:
- Individual Taxpayers
- Hindu Undivided Families (HUF)
- Association of Persons (AOP)
- Body of Individuals (BOI)
- An artificial juridical person.
This exemption based on a monetary threshold of adjusted total revenue, does not apply to LLPs, partnership firms, or other non-corporate taxpayers.
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What Do You Mean by AMT Credit?
Though AMT was designed to collect tax from zero-tax payers, it was also intended to provide a constant flow of revenue to the government.
- In a year when the regular tax is less than the Alternative Minimum Tax (AMT), the AMT is applied.
- If in the following years the regular tax is higher than the AMT, the extra AMT paid earlier can be carried forward and used to reduce the regular tax by the difference.The balance, if any, after such set off can be carried forward to succeeding fiscal years. This notion is known as AMT Credit.
- However, AMT Credit can only be carried forward for up to 15 fiscal years after the fiscal year in which the AMT is paid. The taxpayer will receive no interest on the AMT credit.
- If the regular tax rate changes as a result of an order issued by the income tax department, so will the AMT credit.
- Furthermore, if the taxpayer has a foreign tax credit (tax paid in foreign countries with which India has a bilateral or unilateral tax agreement) to offset the AMT, any FTC in excess of the AMT will be discarded.
Steps to Claim AMT Credit
The following conditions must be met to claim AMT credit:
- The credit should be applied up to the maximum term of 15 assessment years.
- No interest is permitted to be paid on such credit.
- The tax credit under Section 115JD varies if the amount of normal income tax or AMT changes due to an order issued under the Income Tax Act.
- The assessee may also set off bought-forward AMT credit during the fiscal year in which the total adjusted income does not exceed Rs. 20 lakhs after deducting under Section 10AA, Section 35AD, or Chapter VI-A.
How Can You Calculate Adjusted Total Income?
| Taxable income as per normal provisions after all deductions (A) | XXXXX |
| Add: Deduction claimed if any under Chapter VI-A from 80H to 80RRB except 80P (B) | XXXXX |
| Deduction claimed if any under Section 10AA (C) | XXXXX |
| Deduction claimed if any under Section 35AD reduced by regular depreciation allowed (D) | XXXXX |
| Adjusted total income (E) = (A)+(B)+(C)+(D) | XXXXX |
| AMT – 18.5% of (E) |
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Tax Liability Under Applicable AMT Conditions
| Tax liability computed as per normal provisions of the Income-tax Act – normal tax liability | XXXX |
| AMT computed at 18.5% (plus applicable surcharge and cess) on adjusted total income | XXXX |
| Tax liability of taxpayer | Higher of the above |
Pro Tips: AMT
Keep accurate records of AMT paid and credit carried forward and used each year.
- Ensure that the AMT and AMT credits are properly stated on the tax returns.
- It is recommended that you contact with a tax professional or chartered accountant to appropriately calculate and use the AMT credit while also ensuring compliance with tax legislation.
- Individual taxpayers, HUFs, AOPs, BOIs, partnership firms, and LLPs can claim AMT credit if their adjusted total income exceeds Rs 20 lakh. This credit can be carried forward for up to 15 years and used to offset ordinary tax liabilities in subsequent years. Proper computation, record-keeping, and compliance with tax requirements are required to efficiently manage and utilise AMT credits.
Conclusion
The Alternative Minimum Tax (AMT) ensures that taxpayers claiming various deductions still contribute a minimum amount of tax to the government. Introduced to include non-corporate entities and individuals in its ambit, AMT targets those with adjusted total income exceeding ₹20 lakh who benefit from deductions under Section 10AA, Section 35AD, and Chapter VI-A (80H to 80RRB).
AMT promotes tax fairness by minimizing avoidance and ensuring consistent government revenue. Taxpayers should stay compliant by maintaining detailed records of AMT paid and credits claimed.
Though AMT may increase tax in certain years, its credit facility offers relief by allowing a 15-year carry forward. Understanding AMT, calculating it accurately, and claiming the credit smartly can significantly reduce future tax liabilities.
Seeking expert advice helps avoid errors and ensures compliance with evolving tax laws.
Frequently Asked Questions
What is AMT credit?
AMT paid in earlier years can be carried forward for 15 years and adjusted against future normal tax when it exceeds AMT.
How to claim AMT credit?
AMT credit is claimed in income tax returns under Section 115JD, following specific eligibility and conditions.
Are senior citizens exempt from AMT?
Senior citizens are exempt if their adjusted total income is below ₹20 lakh and they don’t claim eligible deductions.
Does AMT apply to salaried individuals?
Generally no, unless they have income from business/profession and claim deductions under specified sections.
What happens if AMT credit is unused after 15 years?
If not utilized within 15 years, AMT credit lapses and cannot be claimed thereafter.
Also Read:
| Understanding the Tax Benefits of a Car Loan |
| Understanding the Impact of GST on Under-Construction Real Estate for Homebuyers |
| Understanding GST Rates on Flat Purchases in 2024 |
