The government has adopted various profit-linked incentives and deductions to encourage investment in different fields and industries. Nonetheless, taxes are among the government’s primary sources of income, and taxes need to be gathered regularly to cover an assortment of costs connected to national welfare.
Alternative Minimum Tax (AMT) is a provision in the Income Tax Act that aims to ensure that individuals with substantial income do not evade paying taxes by utilizing different deductions, exemptions, and incentives.
Scan this article for insights into the workings of AMT.
Overview of Alternative Minimum Tax (AMT)
The Alternative Minimum Tax (AMT) is used to provide assurance to taxpayers who take advantage of a myriad of incentives and deductions that they pay a minimum level of tax. The system protects an entity, especially businesses, from further reducing its tax responsibility to zero or minimal levels due to the amount of deductions or exemptions it takes. AMT applies when the tax computed under general provisions is lower than the tax calculated under AMT regulations. The current AMT rate is 18.5%, apart from any applicable cess and surcharge.
The Objective of AMT in India
AMT was launched to avoid misuse of tax deductions and exemptions under the Income Tax Act of 1961. The provisions guarantee that entities gaining from significant tax incentives supply a minimum amount to the government’s revenue.
It is especially relevant for Hindu Undivided Families, Limited Liability Partnerships (LLPs), partnership firms, and individuals claiming deductions under certain sections of the Act.
Applicability of Alternative Minimum Tax
Initially focused on companies through MAT, the Finance Act of 2011 and amendments in 2012 included AMT to non-corporate taxpayers. The AMT is applicable as specified:
Categories Included Under AMT
Individuals, Association of Persons (AOP), HUFs, Artificial Judicial Persons, or Body of Individuals (BOI) whose adjusted total income surpasses Rs 20,00,000 in a financial year.
Partnership firms, LLPs, and different entities having high adjusted incomes claim deductions under certain provisions.
Conditions for Applicability
AMT applies when taxpayers claim deductions under:
- Section 10AA – Deductions for Special Economic Zone (SEZ) units (50% to 100% deductions).
- Sections 80H to 80RRB – Profit-linked deductions, like those for infrastructure or exports.
- Section 35AD – Deductions for capital expenditure on exclusive businesses (e.g., fertilizer production, cold chain facilities). Unlike usual depreciation allowances, this deduction is awarded in full in the year the expense is accrued. It is not charged under AMT.
Alternative Minimum Tax (AMT) Rates
| Aspects | Details |
| Standard AMT Tax Rate | 18.5% of adjusted total income, plus any applicable cess and surcharge |
| AMT Rate for Units in IFSC | 9% applicable solely to units situated in an International Financial Services Centre (IFSC) and earning income wholly in convertible foreign currency. |
| AMT Rate for Co-operative Societies | 15% of adjusted total income, along with any applicable cess and surcharge. |
Exemptions Under Alternative Minimum Tax
The specified taxpayers do not need to observe the ATM regime if their annual income is below Rs 20 lakhs:
- HUFs (Hindu Undivided Families)
- AOPs (Association of Persons)
- Individual taxpayers
- Artificial Juridical Individuals
- BOIs (Body of Individuals)
Calculation of AMT in India
Following is a stepwise guide to calculating AMT:
Step 1: Compute Tax Liability and Regular Total Income
- Calculate your total income according to the standard provisions of the Income Tax Act.
- Calculate the tax liability on the basis of the relevant tax slab or rates.
Step 2: Compute Adjusted Total Income
- Begin with the total income computed above.
- Include back deductions asserted under Chapter VI-A (except section 80P) and section 10AA.
Step 3: Use the AMT Rate
- Multiply the adjusted total income by the AMT rate of 18.5%.
- Add cess and surcharge as applicable.
Step 4: Match Regular Tax Liability and AMT Liability
If the AMT liability surpasses the regular tax liability, the taxpayer must deposit the higher AMT amount.
Instance of AMT Computation
Let’s take the case of an LLP demanding deductions under section 10AA for its SEZ unit.
- Regular Income Computation:
Total income = Rs 25 lakh
Deductions under Section 10AA = Rs 5 lakh
Taxable income (following deductions) = Rs 20 lakh
Regular tax liability (at 30%) = Rs 6 lakh
- Adjusted Total Income Computation:
Adjusted total income = Rs 25 lakh (including back Rs 5 lakh deduction)
- AMT Calculation:
AMT = 18.5% of Rs 25 lakh = Rs 4.625 lakh
Add cess (4%) = Rs 4.81 lakh
- Final Tax Payable:
Match AMT of Rs 4.81 lakh with regular tax of Rs 6 lakh. As the regular tax liability is higher, the LLP pays Rs 6 lakh in taxes.
AMT Credit
Taxpayers can demand credit for excess AMT disbursed over regular tax liability in the ensuing years. This credit can be carried over for up to 15 years and used when the regular tax liability surpasses the AMT in upcoming fiscal years.
Main Points About AMT Credit:
- AMT credit can solely be utilized to offset the difference between the regular tax and AMT.
- Correct record-keeping is vital for claiming AMT credit in subsequent years.
How to Compute and Claim AMT Credit?
Steps to Compute AMT and Claim Credit:
- Compute the regular tax liability based on relevant tax rates.
- Calculate the adjusted total income by including back deductions and exemptions asserted under fixed sections.
- Use the AMT rate (18.5% or relevant reduced rate) on the adjusted total income.
- Ascertain the difference between regular tax liability and AMT.
- If AMT is more than regular tax liability, the excess amount is regarded as AMT credit, which can be brought forward for up to 15 years.
Instance of AMT Credit Use
Example:
Year 1 (FY 2022-23): LLP’s adjusted total income = Rs 30 lakh.
Regular tax liability: RS 2.5 lakh.
AMT liability: Rs 4 lakh.
AMT credit: RS 4 lakh – Rs 2.5 lakh = Rs 1.5 lakh.
Year 2 (FY 2023-24): LLP’s regular tax liability = Rs 3 lakh, AMT = Rs 2.8 lakh.
Difference: RS 3 lakh – Rs 2.8 lakh = Rs 0.2 lakh.
The LLP can use Rs 0.2 lakh of the AMT credit from Year 1, decreasing its regular tax liability.
Reporting Requirement
All taxpayers covered by AMT provisions are required to procure a report from a Chartered Accountant verifying that AMT and adjusted total income have been calculated according to the provisions of the Income Tax Act in Form No. 29C and present the report on or before the due date for submission of the Tax Audit Report. The report can be filed electronically together with the return of income.
Final Thoughts
In order to avoid tax avoidance and ensure that each taxpayer pays their fair share, the Alternative Minimum Tax AMT taxes differently than the regular tax system. Explanation of AMT shows that it can really become a complicated affair. So, before claiming any exemptions and deductions with respect to your tax return, you have to scrutinize AMT as it relates to your situation. You must also know the rules and how they are to be calculated because there are AMT rates to consider. Knowledge of all this will surely come in for any taxpayer in the reduction of the tax owed.
Taxpayers should also be aware of how tax laws change over time and get expert help to navigate the ins and outs of AMT, maximizing possible benefits while staying within the law’s bounds.
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