Alternative Minimum Tax (AMT) Definition, How It Works

The government aims to encourage investments in certain schemes and has introduced various exemptions and deductions on investments. Taxpayers eligible to claim various deductions and exemptions on their income can become Zero Tax Companies and significantly reduce their tax liability, paying less tax than they can easily pay. Since taxes form a major part of the government’s revenue, it introduced the concept of Alternative Minimum Tax (AMT). This article explains all about Alternative Minimum Tax (AMT) and how it works.

What is Alternative Minimum Tax (AMT)?

Alternative Minimum Tax India is an alternative taxation system in which the government levies an alternate tax on zero-tax or marginal-tax companies. This system was introduced keeping in mind the primary intention of introducing the deductions.

Alternative Minimum Tax (AMT) requires individuals and non corporates to calculate their tax liability using the normal method. And if their tax liability turns out to be less than 18.5%, they have to pay the Minimum Alternative Tax at 18.5%.

In simple words, the individuals and non corporates are required to pay higher of the following -

• Tax liability as per the normal taxation system under the Income Tax Act, 1961
• AMT or Alternative Minimum Tax at the rate of 18.5%.

When is Alternative Minimum Tax Applicable?

In the beginning, the concept of Alternative Minimum Tax was introduced for companies. However, the Finance Act 2011 and 2012 amendments extended the scope of AMT to LLPs, non-corporate taxpayers, and Individuals. AMT is applicable to the following -

Association of Persons (AOP), Body of Individuals (BOI), Individuals, Hindu Undivided Family (HUF), or Artificial Judicial Person whose total adjusted income is more than ₹20,00,000.

Every other person except those mentioned above, without any limit to their income.

However, AMT is applicable to the above-mentioned persons only in the following cases -

• If they claim deductions under sections 80H to 80RRB provided on the profits of industries like hotels, housing projects, small-scale undertakings, infrastructure development, and export business.
• A 100% deduction is provided on capital expenditure incurred by businesses like fertilizer production or cold chain facility under section 35AD.
• A 50% to 100% deduction is provided to Special Economic Zone (SEZ) Units under section 10AA.

What are the Exemptions from AMT?

Although AMT provisions apply to all non-corporates, and individuals, there are certain exemptions to their applicability. The following are exempted from AMT if their annual income is less than INR 20,00,000 -

• Individuals
• Hindu Undivided Family (HUFs)
• Body of Individuals (BOI)
• Association of Persons (AOP)
• Artificial Juridical Person

How is Adjusted Total Income Calculated?

Here’s how Adjusted Total Income and Alternative Minimum Tax are calculated -

How is Tax Calculated Under AMT?

The tax calculation under AMT provisions is as follows -

AMT Credit

AMT credit, also known as the Minimum Tax Credit, can be generated when taxpayers pay AMT in prior years and then are not subject to it in subsequent years because their regular tax liability surpasses their AMT liability. This credit can be carried forward and used to reduce the regular tax liability in future years.

However, certain rules and limitations apply to the utilization of the AMT credit, and the specifics can vary based on changes in tax laws. It\'s essential to consult with a tax professional or use reliable tax software to calculate and apply the AMT credit accurately.