Alternative Minimum Tax (AMT): Meaning, How it Works and Purpose

The Alternative Minimum Tax (AMT) in India ensures a minimum tax payment by non-corporate taxpayers, even with deductions. It operates as a parallel system, calculating tax on an adjusted total income (ATI) at 18.5% (with exceptions). Taxpayers pay the higher of regular tax or AMT.

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Understanding tax obligations is crucial for individuals and businesses alike. The Indian tax system encompasses various provisions like AMT, designed to ensure equitable contribution to public finances.

Initially, a concept called “Minimum Alternate Tax (MAT)” was introduced for companies to ensure a minimum tax payment, especially in financial years (FYs). Here profit-linked deductions resulted in a lower regular tax liability than the calculated MAT. Minimum Alternate Tax involves adjusting total income by adding and deducting specific items, then applying a lower tax rate to this adjusted income.

The Alternative Minimum Tax (AMT), designed for non-corporate taxpayers, operates on similar principles. However, there are differences in applicability, the computation of adjusted income, exemptions, and reporting requirements compared to MAT.

What is the Alternative Minimum Tax?

The AMT full form in tax Alternative Minimum Tax is a minimum tax payable instead of regular income tax if the AMT calculation results in a higher tax liability. The standard AMT rate is 18.5% of adjusted total income, plus applicable surcharge and cess. Essentially, taxpayers subject to AMT provisions pay the greater of their regular income tax or the AMT calculated on their adjusted total income. For units in International Financial Service Centres (IFSCs) earning solely convertible foreign currency, the AMT rate is 9%. Cooperative societies benefit from a reduced AMT rate of 15%.

How the Alternative Minimum Tax Works?

Now that you know what is AMT, let us understand how it works. The AMT in income tax operates as a parallel tax system alongside the regular income tax system. It works as follows:

Calculating Adjusted Total Income (ATI)

Start with Gross Total Income: This is your total income from all sources before any deductions or exemptions.
Add back certain deductions: This is the key difference between regular income tax and AMT. Certain deductions and exemptions that are allowed under the regular income tax system are added back to your income for AMT calculation. These typically include:

Deductions under Chapter VI-A (excluding Section 80P, which pertains to cooperative societies)

Deduction under Section 35AD (related to capital expenditure for specific businesses)

Profit-linked deductions under Section 10AA (for units in Special Economic Zones)

Calculating AMT Liability

Apply the AMT rate: The ATI is then taxed at a specific AMT rate.
The standard rate is 18.5% (plus applicable surcharge and cess).
There are concessional rates for certain entities like IFSC units (9%) and cooperative societies (15%).

Comparing with Regular Income Tax

Calculate regular income tax: You also calculate your income tax liability under the normal income tax rules, considering all applicable deductions and exemptions.
Compare the two: The AMT liability is then compared with your regular income tax liability.

Determining Tax Payable

Pay the higher amount: You are required to pay the higher of the two: either the AMT liability or the regular income tax liability.

Applicability of Alternative Minimum Tax (AMT)

Originally introduced for companies as a Minimum Alternate Tax (MAT or Minimum Alternative Tax), the concept was extended to non-corporate taxpayers through the Alternative Minimum Tax (AMT). The Finance Act of 2011 brought Limited Liability Partnerships (LLPs) under AMT, and subsequent amendments in 2012 broadened its scope to include individuals and all other non-corporate taxpayers.

AMT applies to:

Individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), Bodies of Individuals (BOIs), and artificial juridical persons with Adjusted Total Income (ATI) exceeding ₹20,00,000.
All other non-corporate taxpayers, regardless of income.
Companies already subject to MAT are exempt from AMT.

However, AMT is triggered only when these taxpayers claim specific deductions:

Deductions under Chapter VI-A (excluding Section 80P for cooperative societies) cover profits from specific industries (e.g., hotels, small-scale industries, exports).
100% deduction on capital expenditure for specified businesses (e.g., cold chain facilities, fertilizer production) under Section 35AD.
Profit-linked deductions for Special Economic Zone (SEZ) units under Section 10AA.

Therefore, AMT generally applies to non-corporate taxpayers with “Profits or Gains of Business or Profession” income and only when their regular tax liability is lower than the calculated AMT. AMT does not apply to taxpayers opting for concessional tax regimes under Section 115BAD or the new regime under Section 115BAC.

Exemption from Applicability of AMT

AMT regulations do not apply to individuals, HUFs, AOPs, BOIs, or artificial juridical persons whose adjusted total income is ₹20,00,000 or less in a financial year.

Even if AMT is payable in a given year because it exceeds the regular tax, there may be future years where the regular tax is higher than the AMT. In such cases, the excess AMT paid in prior years can be carried forward and used as a credit to offset the regular tax liability up to the amount by which regular tax exceeds the AMT.

Any remaining AMT credit after this offset can be further carried forward to subsequent financial years. This carried-forward amount is termed “AMT credit,” and it can be carried forward for up to 15 financial years, beginning from the year in which the AMT was originally paid.

What is the Purpose of AMT?

The primary purpose of the Alternative Minimum Tax (AMT) is to ensure that high-income individuals and entities pay a minimum level of tax, even if they utilize various deductions, exemptions, and incentives that significantly reduce their regular income tax liability.

Some key objectives of AMT are:

Prevent tax avoidance: AMT aims to prevent taxpayers from using legal tax breaks to eliminate their tax liability entirely or reduce it to an unreasonably low level.

Promote fairness and equity: By setting a minimum tax threshold, AMT seeks to create a more equitable tax system where everyone pays their fair share, regardless of their ability to utilize complex tax planning strategies.

Increase government revenue: AMT helps to generate additional revenue for the government by ensuring that high-income earners contribute a minimum amount in taxes.

Calculating AMT

Calculating AMT involves a few key steps:

Calculate Adjusted Total Income (ATI):

Start with your gross total income
Add back certain deductions claimed under the Income Tax Act 1961, specifically:

Deductions under Chapter VI-A (excluding Section 80P)

Deduction under Section 35AD

Profit-linked deduction under Section 10AA

Step 2: Calculate AMT Liability:

Apply the applicable AMT rate to the ATI
Standard rate: 18.5% (plus surcharge and cess)
For IFSC units earning solely in convertible foreign currency: 9%
For cooperative societies: 15%

Step 3: Compare with Regular Income Tax:

Calculate your income tax liability under the regular income tax provisions
Pay the higher AMT liability or regular income tax liability

Remember that AMT does not apply to taxpayers opting for concessional tax regimes under Section 115BAD or the new regime under Section 115BAC. By following these steps, you can determine your AMT liability and ensure compliance with Indian tax regulations.

Conclusion

Although the AMT seeks to create a more equitable tax system, its complexity requires taxpayers to be diligent. Understanding AMT provisions, rates, and calculations is essential for effective tax planning. The ability to carry forward and offset AMT credit against future tax liabilities offers some relief. Given the changing nature of tax laws, seeking professional guidance is advisable to navigate the complexities of AMT, ensure compliance, and maximize potential benefits within the legal framework.

FAQs on Alternative Minimum Tax

What is Alternative Minimum Tax (AMT)?

AMT is a tax calculated separately from regular income tax, aiming to ensure high-income earners pay a minimum level of tax by limiting certain deductions and exemptions. It acts as a safety net against tax avoidance.

Who is required to pay AMT in India?

In India, AMT applies to non-corporate taxpayers (individuals, HUFs, AOPs, BOIs, and artificial juridical persons) who claim specific deductions under Chapter VI-A (like 80C, 80G, etc.) exceeding a certain threshold.

How is AMT different from regular income tax?

AMT is calculated on an adjusted income base or minimum alternate tax that disallows certain deductions and exemptions allowed under regular income tax. The higher AMT or regular income tax is payable.

What are the eligibility criteria for AMT?

AMT applies if the adjusted total income or minimum alternate tax exceeds ₹20 lakh and the tax payable under AMT is higher than the regular income tax liability.

What is the rate of Alternative Minimum Tax in India?

The AMT rate in India is 18.5% (plus applicable surcharge and cess) of the adjusted total income.

Does AMT apply to individuals or only businesses?

In India, AMT applies to non-corporate taxpayers, including individuals, HUFs, AOPs, BOIs, and artificial juridical persons, not to companies (which are covered by Minimum Alternate Tax - MAT).

Alternative Minimum Tax (AMT): Meaning, How it Works and Purpose

What is the Alternative Minimum Tax?

How the Alternative Minimum Tax Works?

Calculating Adjusted Total Income (ATI)

Calculating AMT Liability

Comparing with Regular Income Tax

Determining Tax Payable

Applicability of Alternative Minimum Tax (AMT)

Exemption from Applicability of AMT

What is the Purpose of AMT?

Calculating AMT

Conclusion

FAQs on Alternative Minimum Tax

What is Alternative Minimum Tax (AMT)?

Who is required to pay AMT in India?

How is AMT different from regular income tax?

What are the eligibility criteria for AMT?

What is the rate of Alternative Minimum Tax in India?

Does AMT apply to individuals or only businesses?

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