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Your Guide to Understanding Alternative Minimum Tax

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January 16, 2020

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Every government requires a regular inflow of money to fund the country's expenses and develop better infrastructure. The tax that a responsible citizen pays is used by the government to fund social welfare programmes and help the country grow. Additionally, the country also welcomes investments that enable them to further market growth. One of the most important ways in which investments are encouraged is through tax incentives and profit linked tax deductions. Given that certain companies and individuals could take advantage of these schemes to avoid paying any tax at all, the Government of India introduced Alternative Minimum Tax (AMT) through the Finance Act of 2011.

What is Alternative Minimum Tax?

As the name quite clearly suggests, AMT is a minimum tax that individuals and businesses might be required to pay. The AMT serves as an alternative to your regular tax liability and calculation. A separate set of rules and regulations govern the calculations of taxable income and deductions under AMT. The purpose of the AMT is to prevent taxpayers from using legal tax breaks to avoid paying any tax at all.

When Is AMT Applicable?

Now that you're familiar with what Alternative Minimum Tax is, let's take a look at who is required to pay this tax. Ideally, AMT will only be applicable to those taxpaying individuals whose total adjusted income exceeds Rs. 20,00,000. Additionally, for AMT to be applicable, these individuals should have claimed deductions under Sections 80H to 80RRB (excluding Section 80P), Section 35AD and Section 10AA of the Income Tax Act.

What Is the Alternative Minimum Tax Exemption?

The Alternative Minimum Tax provisions aren't applicable to an individual, Hindu Undivided Family (HUF), Body of Individuals (BOI), Association of Persons (AOP) and artificial juridical individuals whose adjusted total income does not exceed Rs. 20 lakh.

How is Liability Under AMT Calculated?

To understand an individual's tax liability under AMT, let's see how the adjusted total income is calculated. Start by calculating the tax liability under the normal provisions of the Income Tax Act. To this amount, you will be required to add the deductions that have been claimed under Sections 80H to 80RRB (excluding 80P), Section 35AD and Section 10AA. If a deduction has been claimed under Section 35AD, you will need to deduct the depreciation that is allowed as per the guidelines provided under Section 32. You will now have the adjusted total income on which an individual is liable to pay AMT.

Calculating Adjusted Total Income

Let's take a look at an example to better understand the calculation of adjusted total income.

Mr Kapoor's regular taxable income is Rs. 20,50,000. For the given year, he has not made any claims under Sections 35AD or from Sections 80H to 80RRB. However, he has claimed a deduction of Rs. 25,000 under Section 10AA. Here's how we can calculate his adjusted total income:

Regular Taxable Income

Rs. 20,50,000

Deductions Claimed Under Sections 80H to 80RRB

 

Deductions Claimed Under Section 10AA

Rs. 25,000

Deductions Claimed Under Section 35AD

 

Adjusted Total Income (Regular Taxable Income + Deductions)

Rs. 20,75,000

How Much AMT Is an Individual Liable to Pay?

For individuals to whom AMT is applicable, AMT is levied at a rate of 18.05%. This rate will be charged on the adjusted total income. Additionally, surcharge and cess could also be levied as applicable.

What Is Alternative Minimum Tax Credit?

If a person's tax liability is higher under AMT calculations and the individual pays the taxes due, they will be authorised to claim a certain amount of credit in the following years based on how much AMT has been paid. This means that the AMT can be carried forward for the next 15 years and can be adjusted during years when the individual's regular tax calculations are higher than their AMT. This concept is called Alternative Minimum Credit.

Obtaining the AMT Report

As per the guidelines provided under Section 115JC of the Income Tax Act, an individual who has to pay AMT will need to furnish a report that verifies the calculations. In order to do this, Form 29C has to be filled out and verified by a Chartered Accountant (CA). The CA has to certify that the calculations of both the adjusted total income and the AMT have been calculated as per the guidelines. This report will have to be attached to the individual's income tax slab rates (ITR) when they are being filed.

What Does the Report Contain?

According to the Institute of Chartered Accountants of India (ICAI) guidelines, the AMT report should have three paragraphs.

The first paragraph will be a declaration stating that the CA has indeed examined all the necessary accounts and records of the taxpayer in order to calculate the amounts correctly.

The second paragraph will include certification of the calculations that have been used to arrive at the adjusted total income and the AMT. Additionally, it will highlight the total amount of tax that the individual is liable to pay Under Section 115JC.

Finally, the third paragraph verifies that the details furnished in the attached document, Annexure A, are indeed correct.

The details that need to be provided under Annexure A of the report include:

  1. The name of the taxpayer
  2. The taxpayer's address
  3. The taxpayer's PAN
  4. The assessment year (for FY18-19, the assessment year will be FY19-20)
  5. The taxpayer's total income
  6. The total tax payable based on this income
  7. The deductions that have been claimed under Sections 80H to 80RRB (except 80P)
  8. The deductions that have been claimed under Section 10AA
  9. The deductions that have been claimed under Section 35AD, including the depreciation as allowed by Section 32
  10. The taxpayer's adjusted total income
  11. The taxpayer's AMT

Now that you have understood what AMT is and the laws that govern it, you will be able to understand your personal tax liability better. You can also calculate your AMT, should you be liable to pay it, and avoid receiving a notice from the Income Tax Department declaring that you have filed an incorrect ITR or still have to pay a certain amount of your tax. Don't forget, when it comes to filing your ITR and paying your taxes, it's always best to get everything done before the due date to avoid paying a hefty fine later.

Calculate your Income tax

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal Vishal Subharwal

Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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