Alternative Minimum Tax (AMT): Meaning, Applicability & Calculation

Alternative Minimum Tax (Alternative Minimum Tax (AMT) is a minimum tax provision under India’s Income-tax Act designed to ensure that taxpayers who claim a wide range of tax deductions still pay a base level of tax. It works as an alternative to regular income tax, if the tax computed under AMT exceeds your normal tax, you must pay AMT instead. AMT mainly affects non-corporate taxpayers like individuals, HUFs, LLPs, firms, and association of persons (AOPs) who claim certain deductions and have higher adjusted incomes. This system prevents taxpayers from reducing their tax liability too low through incentives and deductions.

What is Alternative Minimum Tax (AMT)

Alternative Minimum Tax (AMT) is a parallel tax calculation that applies to non-corporate taxpayers who benefit from various deductions or exemptions. When the normal income-tax liability is lower than the AMT liability, you must pay the higher AMT amount. AMT is calculated on an Adjusted Total Income (ATI) after adding back certain deductions to regular taxable income.

Why AMT Exists

The purpose of AMT is to:

• Ensure that taxpayers who reduce their tax through numerous deductions and exemptions still pay a minimum tax amount.
• Prevent excessive use of incentives that push taxable income unfairly low
• Align tax collection with overall economic contributions from different income streams.

AMT functions similarly to Minimum Alternate Tax (MAT) for companies, but AMT applies to non-corporate taxpayers under Sections 115JC to 115JF of the Income-tax Act.

Who is Eligible (Liable) for AMT

AMT provisions apply to:

• Individuals, HUFs, AOPs, BOIs and artificial juridical persons who claim deductions under specified sections (e.g., Chapter VI-A except section 80P or likes of Section 10AA).
• Partnership firms and LLPs, irrespective of adjusted total income in some cases.

Entities NOT covered by AMT:

• Companies (they are covered under MAT instead).
• Individuals/HUFs/AOPs/BOIs whose adjusted total income is less than ₹20 lakh in a financial year may be exempt from AMT.

What is Adjusted Total Income (ATI)

To calculate AMT, you first determine your Adjusted Total Income (ATI):

• Start with your total income as per normal provisions (after deductions).

• Add back specified deductions claimed under:

  1. Sections under Chapter VI-A (e.g., 80H to 80RRB, excluding section 80P)
  2. Section 10AA (SEZ units)
  3. Deductions like Section 35AD (capital expenditure) reduced by regular depreciation.

This ATI represents the income figure used to calculate the AMT liability.

How to Calculate AMT (Step-by-Step)

Step 1: Compute Normal Tax

Calculate your total income and compute tax liability under the standard income-tax rules (including cess and surcharge where applicable).

Step 2: Compute Adjusted Total Income (ATI)

Add back specific deductions mentioned earlier to your total income to get the Adjusted Total Income.

Step 3: Apply AMT Rate

Multiply the Adjusted Total Income by the AMT rate:

• 18.5% of adjusted total income plus applicable surcharge and cess.
• 9% (plus surcharge/cess) for units in an International Financial Services Centre (IFSC) earning only in convertible foreign currency.
• 15% rate may apply for cooperative societies (as per certain budget provisions).

Step 4: Compare and Pay

Your total tax payable for the year is the higher of:

• Normal tax liability, or
• AMT liability calculated above.

The higher amount becomes your actual tax payable for the year.

AMT Example

Suppose:

• Your normal tax liability = ₹2,50,000
• Adjusted total income after adding back deductions = ₹30,00,000
• AMT @ 18.5% of ₹30,00,000 = ₹5,55,000 (before surcharge/cess)

Since AMT (₹5,55,000) is higher than normal tax (₹2,50,000), you must pay the AMT amount.

AMT Credit - Carry Forward and Set-Off

If you pay AMT in a year, you may generate an AMT credit. This credit can be carried forward for up to 15 assessment years and set off in a year when your normal tax liability exceeds the AMT liability.

This helps balance tax burdens across years and ensures you don’t permanently lose the benefit of early AMT payments.

Key Points to Remember

• AMT is triggered only if normal tax < AMT liability.
• It applies mainly to non-corporate taxpayers taking advantage of tax incentives.
• The threshold of ₹20 lakh ATI exempts smaller non-corporate taxpayers like many individuals and HUFs.
• AMT ensures that even with deductions, taxpayers pay a minimum tax contribution.

Conclusion

Alternative Minimum Tax (AMT) is a tax safeguard under India’s tax system that ensures taxpayers, especially non-corporate ones, who benefit from various deductions pay a base amount of tax. AMT is calculated at 18.5% (or applicable rate) on Adjusted Total Income and compared against regular tax. If the AMT figure is higher, it becomes your tax liability for the year. AMT credit allows you to carry forward excess AMT paid when your regular tax becomes higher in future years, improving long-term tax equity and compliance.MT): Meaning, Applicability & Calculation