What is Alternative Minimum Tax?

To boost investments in various industries, the Indian government has introduced several income tax deductions and exemptions. Eligible taxpayers can take advantage of these deductions to reduce their income tax liabilities. But at the same time, the government also needs a consistent source of funds to help the country grow.So, to ensure that individual taxpayers do not over-use the available deductions and exemptions, the Finance Act 2011 introduced Alternative Minimum Tax (AMT). The idea behind AMT is similar to MAT (Minimum Alternative Tax) that was initially introduced for corporate taxpayers.But the way in which AMT is applicable, exemptions, computation of adjusted income, etc. are different from MAT. Take a detailed look at what AMT is and its applicability.

AMT is an alternative to the standard income tax regime which a taxpayer might have to follow for paying taxes to the government. As compared to the regular tax regime, AMT has its own set of rules, exemptions, calculations, and deductions.The primary purpose of AMT is to ensure that taxpayers do not overuse tax deductions and exemptions up to a limit, where they do not pay any tax at all.

As mentioned above, the minimum tax concept was first introduced for corporate taxpayers. In 2011, AMT was introduced and also included LLPs (Limited Liability Partnerships). The Finance Act 2012 introduced some amendments, and AMT is now applicable to the individual as well as corporate taxpayers.In simple words, AMT applies to taxpayers with an adjusted annual income of more than Rs. 20 lakhs. It is also applicable to taxpayers who have claimed income tax deductions under Section 80H to 80RRB of the IT Act, excluding Section 80P . Taxpayers with deductions under Section 10AA and Section 35AD should also follow the AMT regime.

The following taxpayers are not required to follow the AMT regime if their annual income is less than Rs. 20 lakhs-

• Individual taxpayers
• HUFs (Hindu Undivided Families)
• BOIs (Body of Individuals)
• Artificial Juridical Individuals
• AOPs (Association of Persons)

The rate of AMT for non-corporate taxpayers is 18.5% of their total adjusted income. However, for non-corporate taxpayers that are located in the International Financial Services Centre and deriving their income solely in convertible foreign exchange, AMT is levied at 9%.Note:- With effect from Assessment Year 2023-24, the rate of AMT has been reduced from 18.5% to 15% in the case of a co-operative society.

Here is how the tax liability is calculated as per the AMT regime-The taxpayer first needs to calculate his/her tax liability as per the standard income tax regime. Deductions that are covered under AMT, like Section 80H to 80RRB, Section 10AA, Section 35AD, etc., if claimed, should be added to the tax liability.The amount after adding these deductions is your adjusted income. AMT of 18.05% will then apply to this adjusted income. Additional cess and surcharge are applicable too.

Let us assume that you have an annual income of Rs. 22 lakhs and you have only claimed deduction of Rs. 25,000 under Section 10AA.

So, this deduction of Rs. 25,000 will be added to your income, taking your total income for the year to Rs. 22.25 lakhs. This Rs. 22.25 lakhs is now your adjusted income on which the Alternative Minimum Tax will be applicable.

Now you might have understood what AMT is and when it is applicable. If you do fall in the category of taxpayers who are required to pay AMT, thoroughly understand how the calculation is done so that you can pay the applicable taxes and protect yourself from notices or penalties from the IT department.Professional assistance is always recommended in case if you are new to AMT and want to ensure that your tax calculation and returns filing is done in a correct and timely manner.Ready to make the most of your money? Start your tax planning journey now!