Alternative Minimum Tax (AMT)

What is Alternative Minimum Tax (AMT)?

The Alternative Minimum Tax (AMT) is a mechanism designed to ensure that taxpayers who benefit from various deductions and incentives pay a baseline level of tax. This system prevents entities, especially businesses, from reducing their tax liability to zero or minimal amounts through the extensive use of exemptions and deductions. AMT becomes applicable when the tax calculated under standard provisions is less than the tax computed under AMT rules. The prevailing AMT rate is 18.5%, in addition to any applicable surcharge and cess. 

Key Features of AMT:

• Applicability: AMT is levied on adjusted total income when it exceeds the normal tax liability.
• Adjusted Total Income: Derived by adding back certain deductions and incentives to taxable income.
• Minimum Tax Liability: Taxpayers must pay the higher of regular tax liability or AMT.

Steps to Calculate AMT

1. Determine Adjusted Total Income (ATI):
   Adjusted total income is calculated by:
   • Adding back deductions claimed under Chapter VI-A (Sections 80H to 80RRB, except 80P).
   • Including deductions under Section 10AA and Section 35AD (reduced by regular depreciation).
2. Apply the AMT Rate:
   Multiply the adjusted total income by the AMT rate of 18.5% (plus applicable surcharge and cess).
3. Compare Normal Tax and AMT:
   • If the normal tax liability is higher, pay the normal tax.
   • If AMT is higher, pay the AMT.

Exemptions and AMT Credit

1. Exemptions from AMT:
   AMT provisions do not apply to:
   • Individuals, Hindu Undivided Families (HUFs), Associations of Persons (AOPs), and Bodies of Individuals (BOIs) with an adjusted total income of ₹20,00,000 or less.
2. AMT Credit:
   • When AMT is paid in a financial year where it exceeds normal tax, the excess AMT can be carried forward as AMT credit.
   • This credit can be set off against the higher normal tax liability in subsequent years.
   • Unutilized AMT credit can be carried forward for up to 15 financial years.

Advantages of AMT

1. Ensures Tax Equity: Prevents businesses and individuals from completely avoiding taxes by leveraging deductions.
2. Sustainable Tax Revenue: Provides the government with consistent revenue, enabling funding for welfare projects.
3. Promotes Responsible Use of Incentives: Encourages taxpayers to utilize exemptions judiciously while ensuring they contribute a fair share to the tax system.
4. Flexibility with AMT Credit: Allows taxpayers to offset AMT paid against future higher normal tax liabilities.

Filing Process for AMT

1. Identify Applicability: Determine whether AMT provisions apply based on adjusted total income and entity type.
2. Compute Adjusted Total Income: Add eligible deductions to taxable income as per the AMT rules.
3. Calculate Tax Liability: Compute both normal tax and AMT. Compare and determine the higher amount.
4. Pay Tax and Claim Credit: If AMT exceeds normal tax, pay AMT and track any credit available for future use.
5. File Tax Returns: Disclose details of AMT calculation and AMT credit in the appropriate schedules of the tax return form.