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What is Alternative Minimum Tax?

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Alternative Minimum Tax, also known as AMT, is a legal substitute for standard taxation. There is an AMT of 18.5% (plus applicable surcharge and cess) to be paid by citizens falling under certain criteria, as discussed later in this article. When the tax on regular income is lower than the Alternative Minimum Tax on adjusted total income during a fiscal year (FY), it is levied on the “adjusted total income.” Therefore, regardless of their ordinary tax duties, people subject to AMT laws are required to pay AMT.

Did you know?

Interest on mortgage borrowings used to purchase, construct, or upgrade a home is deductible under the AMT. This tax does not permit interest deduction if you borrowed money against your house for another reason.

Applicability of AMT

The idea of a minimum tax, as was previously mentioned, was initially implemented for corporations before being gradually expanded to noncorporate taxpayers. The Alternative Minimum Tax (AMT) on Limited Liability Partnerships (LLPs) was first implemented by the Finance Act of 2011, and the Finance Act made the current version of the provisions in 2012. As a result, the following taxpayers are subject to the Alternative Minimum Tax provisions:

  • Taxpayers who do not come under the category of corporations
  • Individuals who filed a tax return and claimed one of the deductions under categories such as
  • Chapter VI A
  • Section 35AD
  • Section 10AA (Profit-linked deduction)

Also read: Everything You Need to Know About Surcharge on Income Tax

Exemption From AMT’s Applicability 

The following individuals do not come under the applicability of AMT:

  • An individual of Hindu Undivided Family (HUF)
  • Individual belonging to Association of Persons (AOP)
  • Body of Individuals (BOI)
  • An artificial juridical person whose adjusted total income does not exceed ₹20,00,000

Since LLPs, partnership businesses, and other non-corporate assessees do not fall under corporations, they are not covered by this exemption based on a monetary threshold of adjusted total revenue.

AMT Credit

Although the AMT tax was implemented to recoup taxes from businesses that pay no taxes, it also aimed to ensure a steady stream of taxes to the public coffers. Therefore, a minimum tax is charged in an FY where the average tax is lower than the amount of AMT. AMT paid in prior FYs is allowed to be carried forward and lowered against average tax. The AMT is lowered to the extent of the difference between average tax and AMT in succeeding FYs when AMT is lower than expected tax. Any remaining balance after such a set-off may be carried over to the next fiscal year. AMT Credit is the name given to this idea.

AMT Credit, however, may only be carried forward for a maximum of 15 fiscal years (FYs) from the FY in which such AMT tax is paid. The AMT credit shall adjust in accordance with any modifications to regular tax brought on by any orders made by the income tax department.

Additionally, any FTC over the AMT would be disregarded if the person has any foreign tax credits (taxes paid in foreign nations with which India has bilateral or unilateral tax agreements). This is because these tax credits can be claimed against the AMT.

Calculation of AMT in Income Tax

Let’s look at how the adjusted total income is determined to comprehend a person’s tax obligations under the AMT. 

  • Start by determining the tax liability under the standard Income Tax Act provisions. 
  • You must add the deductions claimed under Sections 80H through 80RRB (80P excluded), Section 35AD, and Section 10AA to this sum. 
  • You must deduct the depreciation that is permitted according to the rules outlined in Section 32 if a deduction has been claimed under Section 35AD. 
  • The adjusted total income that an individual is required to pay AMT will now be in front of you.

Adjusted Total Income

The term “adjusted total income” refers to gross income that has had all deductions allowed under section C of chapter VI-A added to it. As a result, all deductions from Section 80HH through Section 80RRB, with the exception of Section 80P and Section 10AA, are added to gross income.

To further understand how adjusted total income is calculated, let’s look at an example.

The normal taxable income of Mr. Singh is ₹20,50,000. He has not filed any claims for the current year under Sections 35AD or 80H through 80RRB. He has, however, requested a deduction under Section 10AA for ₹25,000. How to determine his adjusted total income is shown below:

Regular Taxable Income

₹20,50,000

Deductions Claimed Under Sections 80H to 80RRB

 

Deductions Claimed Under Section 10AA

₹25,000

Deductions Claimed Under Section 35AD

 

Adjusted Total Income (Regular Taxable Income + Deductions)

₹20,75,000

Also read: Learn about Exempt Income Under Section 10 of Income Tax in Detail

What Amount is One Liable to Pay as AMT?

AMT is charged to those who are subject to it at a rate of 18.05%. This rate will be applied to the actual income after adjustments. Surcharges and cess may also be imposed when necessary.

AMT Tax Rate

The following table shows the tax rate under the alternative minimum tax:

S.No.

Adjusted Total Income

For firms or cooperative societies

Other non-cooperative holders

1.

Income up to ₹1 Crore

19.055% (Including surcharge and cess)

19.055% (Including surcharge and cess)

2.

Income Exceeding ₹1 Crore

21.3416% (Including tax and cess)

21.91325% (Including tax and cess)

AMT Tax Report 

AMT payers must provide a report that validates the computations per the rules outlined in Section 115JC of the Income Tax Act. Form 29C must be completed and confirmed by a Chartered Accountant (CA). The CA must attest that the AMT and adjusted total income computations have been made following the rules. 

This report must be submitted when the individual files their Income Tax Returns (ITR).

What Does AMT Tax Report Contain?

The AMT Tax report should have three paragraphs, as per the recommendations of the Institute of Chartered Accountants of India (ICAI).

  • The first paragraph will declare that the CA has reviewed the taxpayer’s accounts and records required for appropriately calculating the amounts.
  • The calculations are utilised to determine the adjusted total income, and the AMT will be certified in the second paragraph. The entire amount of tax the person must pay under Section 115JC will also be highlighted.
  • The third paragraph confirms that the information provided in Annexure A, the paper that is attached, is accurate.

Reducing the Alternative Minimum Tax

Maintaining the lowest feasible adjusted gross income (AGI) is an excellent way to reduce your AMT liability. Different options

  • Make the maximum permitted salary deferral contributions to your SIMPLE IRA, 401(k), 403(b), SARSEP, or 457(b) plan. Self-employed people can also lower their AGI by making tax-deductible contributions to 401(k)s or other qualifying retirement plans.
  • Contribute to flexible spending accounts before taxes. For health insurance and help with dependent care, there are FSAs.
  • Reduce your taxable income by using employer-sponsored cafeteria plans to pay for other expenses like life insurance on a pretax basis.
  • Reposition your taxable investment portfolio’s investment holdings. For instance, as a means to lower your AGI, think about moving to tax-efficient mutual funds and tax-exempt bonds or bond funds.
  • Keep an eye on when specific payments are due. Prepaying real estate taxes, estate taxes, or local income taxes, for instance, can save on ordinary tax but cost if liable to the AMT. Therefore, if paying your 2022 real estate bill in 2021 will result in or raise your AMT liability for 2021, don’t do it just to get a modest reduction for paying early.
  • Consider tax credits. Nonrefundable personal tax credits, such as the dependent care and foreign tax credits, can be used to offset any AMT liability. If you had previously paid AMT, you might also be eligible for a minimum tax credit.

Also read: AIS Income Tax – Learn all about Annual Information Statement in Detail | Legaltree

Conclusion

It can be difficult to figure out your AMT or even if you are actually subject to it. This article fully explain the AMT or how it could effect your taxes because it includes everything about the topic.

It may be wise to have your tax return prepared, or at least reviewed, by a qualified tax professional who can determine whether you owe the AMT, qualify for exemptions, and can claim AMT credits for any year—including prior years—unless you are an expert in tax preparation and fully comprehend how the AMT operates.
Follow Legal Tree for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

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