ALTERNATIVE MINIMUM TAX

ALTERNATIVE MINIMUM TAX

Alternative Minimum Tax (AMT) is the Income-tax Act's guarantee that non-corporate taxpayers — individuals, HUFs, LLPs, firms, AOPs, and BOIs — cannot reduce their effective tax to near-zero by stacking incentive deductions. Governed by Sections 115JC to 115JF in Chapter XII-BA of the Income-tax Act 1961, AMT requires you to compute an Adjusted Total Income (ATI), apply 18.5% (or 9% for eligible IFSC units), and pay whichever is higher — regular tax or AMT. Any excess paid becomes a credit that travels with you for up to fifteen assessment years.

What Is AMT, and Who Is Actually Liable?

AMT is the non-corporate twin of Minimum Alternate Tax (MAT) under Section 115JB, which applies only to companies. Parliament introduced AMT specifically because partnership firms, LLPs, and other pass-through structures were using SEZ, infrastructure, and specified-business deductions to eliminate their tax liability entirely. The provisions under Sections 115JC to 115JF plug that gap.

Persons to whom AMT applies:

• Individual taxpayers operating under the old tax regime
• Hindu Undivided Families (HUFs) under the old regime
• Association of Persons (AOPs) and Bodies of Individuals (BOIs)
• Artificial Juridical Persons (AJPs)
• Partnership firms
• Limited Liability Partnerships (LLPs)

Persons outside AMT's scope:

• Companies (governed by MAT under Section 115JB)
• Individuals and HUFs who have opted for the new tax regime under Section 115BAC (explained in detail below)
• Co-operative societies (a separate framework applies)

The ₹20 lakh threshold — and why it does not apply to your LLP:

Section 115JC(1) contains a threshold that trips up many practitioners. For individuals, HUFs, AOPs, BOIs, and AJPs, AMT applies only if Adjusted Total Income exceeds ₹20 lakh. If your individual client's ATI works out to ₹19.8 lakh, AMT is not triggered — regular tax applies.

For partnership firms and LLPs, no such threshold exists. AMT applies to every rupee of ATI, regardless of whether the LLP is a two-partner boutique or a hundred-partner operation. This asymmetry is a structural fact that should appear in every LLP formation memo.

The Adjusted Total Income Computation: Step by Step

Adjusted Total Income (ATI) is not your gross income, and it is not your regular taxable income either. It is a legislatively defined hybrid — regular taxable income after certain specific deductions are added back.

Step 1: Take the total income as computed under the regular provisions of the Act, after all normal deductions, exemptions under Section 10, and set-off of losses.

Step 2: Add back deductions claimed under Chapter VI-A under the heading "C — Deductions in respect of certain incomes" — that is, Sections 80H to 80RRB, but excluding Section 80P (co-operative societies). The key deductions in this category include:

• Section 80IA — infrastructure undertakings
• Section 80IAC — eligible start-ups
• Section 80IB, 80IC, 80ID, 80IE — special-area and sector incentives
• Section 80JJAA — employment generation deduction
• Section 80LA — offshore banking units
• Section 80QQB, 80RRB — author and patent royalties

What is not added back: Deductions under Sections 80C, 80D, 80CCC, 80CCD — these fall under the "B — Deductions in respect of payments" heading and are personal savings/protection deductions. They are irrelevant to the ATI adjustment.

Step 3: Add back deductions claimed under Section 10AA (profits of SEZ units).

Step 4: Add back the deduction claimed under Section 35AD minus the depreciation that would have been allowable on the same assets under Section 32 (normal depreciation).

The Section 35AD carve-out matters. The legislature is not trying to penalise the capital expenditure itself — just the excess benefit over normal depreciation. If you spent ₹80 lakh on cold-chain infrastructure and claimed ₹80 lakh under Section 35AD, but normal plant and machinery depreciation at 15% would have been ₹12 lakh, your ATI add-back is ₹68 lakh, not ₹80 lakh.

Result: Adjusted Total Income (ATI)

AMT Rate, Threshold, and the 9% IFSC Exception

Standard AMT rate: 18.5% of ATI, plus applicable surcharge and 4% Health and Education Cess.

Surcharge (AY 2027-28, as applicable to non-corporate taxpayers):

• Individuals: 10% where total income exceeds ₹50 lakh; 15% where it exceeds ₹1 crore (subject to marginal relief provisions)
• Partnership firms and LLPs: 12% where total income exceeds ₹1 crore

IFSC concessional rate (Section 115JC(4)): An LLP or other eligible person with a unit located in an International Financial Services Centre (IFSC) — such as GIFT City in Gujarat — that derives income solely in convertible foreign exchange is taxed at 9% of ATI instead of 18.5%. This is a significant structural advantage for IFSC-based fund administration firms, treasury management entities, and capital market intermediaries operating through LLP structures.

Practical tip: If your LLP is in GIFT City and receives even a small portion of its income in Indian rupees (say, domestic advisory fees), you must examine whether the "solely in convertible foreign exchange" test is met. A mixed-income IFSC LLP loses the 9% rate entirely and falls back to 18.5%.

Worked Example 1: LLP with a Section 10AA (SEZ) Deduction

Facts — FY 2026-27 (AY 2027-28):

An IT services LLP with two partners operates a STPI/SEZ-approved unit in its third year (within the first five-year 100% deduction window under Section 10AA).

Step 1 — Regular tax: Total income is ₹0. Regular tax = ₹0.

Step 2 — Adjusted Total Income:

Regular income ₹0 + Section 10AA add-back ₹80,00,000 = ATI ₹80,00,000

Step 3 — AMT computation:

Step 4 — Compare: Regular tax ₹0 < AMT ₹15,39,200 → The LLP pays ₹15,39,200 as AMT.

Step 5 — AMT credit (Section 115JD):

Excess AMT over regular tax = ₹15,39,200 − ₹0 = ₹15,39,200 carried forward as AMT credit.

In Year 6 of operations, when the SEZ deduction tapers to 50% and then to 0%, regular tax will begin to exceed AMT. The LLP can then apply the accumulated credit to reduce that future regular tax liability — provided the credit does not age beyond fifteen assessment years from the year it arose.

Worked Example 2: Individual Consultant with Section 80JJAA

Facts — FY 2026-27 (AY 2027-28):

A consulting professional operates under the old tax regime and employs 45 new workers through a dedicated team, qualifying for Section 80JJAA (employment generation deduction).

Regular tax (old regime slabs, AY 2027-28 — illustrative):

Adjusted Total Income:

• Regular taxable income: ₹25,50,000
• Add back: Section 80JJAA (a "C" category deduction): ₹18,00,000
• Section 80C is not added back (it is a "B" category deduction)
• ATI: ₹43,50,000 (exceeds ₹20 lakh threshold → AMT applies)

AMT computation:

Result: AMT ₹8,36,940 > Regular tax ₹6,00,600 → Pay AMT ₹8,36,940.

AMT credit of ₹2,36,340 (₹8,36,940 − ₹6,00,600) is eligible for carry-forward under Section 115JD.

The takeaway for this professional: Claiming ₹18 lakh under Section 80JJAA reduced the taxable income, but AMT neutralised most of that benefit. The net cash outflow is ₹8.37 lakh rather than ₹6 lakh. AMT credit is real but conditional on future profits.

AMT Credit Under Section 115JD — Your Fifteen-Year Deferred Asset

Where AMT paid in a year exceeds regular income tax, the excess is granted as AMT credit under Section 115JD. This credit is not a loss — it is a direct offset against future tax liability.

How set-off works: In any subsequent assessment year where regular income tax exceeds AMT, the credit can be set off to the extent of that excess. You cannot use AMT credit to bring your effective tax below regular tax — it only operates in the space between regular tax and AMT.

Carryforward period: Fifteen assessment years from the year in which the credit first arose. If unused by year fifteen, it lapses irrevocably.

Practical credit management:

• Maintain a year-wise AMT credit register, similar to how companies track MAT credit
• At the year-end, confirm the earliest vintage of credit that is approaching expiry
• During LLP restructuring or dissolution, reconcile the credit position. AMT credit does not transfer to successor entities — it dies with the LLP
• If the LLP is planning an asset sale or capital gain in a future year, model whether that will generate sufficient regular tax to absorb aged credits before they lapse
• Disclose AMT credit as a deferred tax asset in the audited financial statements, with appropriate accounting for recoverability under Ind AS 12 or AS 22 depending on the applicable framework

Form 29C: The CA Report You Cannot Skip

Section 115JC(3) makes it mandatory for every taxpayer liable to AMT to obtain and furnish a report in Form 29C from a Chartered Accountant, certifying the computation of Adjusted Total Income and AMT.

What Form 29C covers:

1. Computation of total income under regular provisions
2. Each add-back to arrive at ATI (10AA, 35AD, Chapter VI-A deductions)
3. AMT computed at the applicable rate (18.5% or 9%)
4. Regular income tax for the same year
5. The excess, if any, qualifying as AMT credit

Filing sequence for AY 2027-28:

1. Prepare the ATI workings with section-wise references for each add-back
2. The CA reviews the deduction claims, verifies the depreciation calculation for Section 35AD adjustments, and checks the applicable rate (especially for IFSC units)
3. CA digitally signs and uploads Form 29C on the income-tax portal (e-filing portal, incometax.gov.in)
4. The return acknowledgment number from Form 29C is referenced in the ITR filing
5. File ITR (typically ITR-5 for LLPs and partnership firms) on or before the due date — for taxpayers subject to audit, this is 31 October of the assessment year (i.e., 31 October 2027 for AY 2027-28), as notified

Do not file the return without Form 29C: If you file an ITR without the Form 29C report where AMT is applicable, the return is technically defective under Section 139(9). The assessing officer can issue a defect notice, and if not rectified within fifteen days, the return may be treated as not filed.

AMT and the New Tax Regime Under Section 115BAC

This is the most practically significant intersection in AMT planning for FY 2026-27.

If you are an individual or HUF on the new tax regime: AMT does not apply to you. The mechanism is simple: the new tax regime under Section 115BAC disallows Chapter VI-A deductions (except 80CCD(2) and 80JJAA), Section 10AA, and Section 35AD benefits. Because there are no qualifying deductions to add back, ATI equals regular income, and regular tax equals AMT — making the entire AMT provision moot.

This is one of the structural reasons why small professionals running SEZ-adjacent businesses or claiming Chapter VI-A incentives find the new regime administratively cleaner — it eliminates AMT exposure while offering lower slab rates for moderate income levels.

For LLPs and partnership firms: The new tax regime under Section 115BAC is not available. Firms and LLPs remain taxed at the flat rate of 30% under the old regime by default. AMT therefore remains a live concern for every LLP claiming Section 10AA or 35AD — and there is no way to opt out of it by regime choice.

The decision matrix for founders structuring LLP operations:

If the projected AMT credit is unlikely to be utilised within fifteen years — because the business will remain deduction-heavy and generate modest regular tax — incorporating the business as a company and subjecting it to MAT (which has similar credit provisions but a different rate structure) may be worth modelling.

Sectors Where AMT Bites Hardest

AMT is not a theoretical concern for most taxpayers. It concentrates in a few specific sectors:

• Technology services LLPs with SEZ units: Section 10AA deductions on SEZ unit profits are the most common ATI trigger. Year one through five of a new SEZ unit can eliminate regular tax entirely, making AMT the effective tax rate.
• Infrastructure and specified businesses under Section 35AD: Cold chain logistics, fertiliser production, affordable housing projects, hospitals, and hotels in notified areas that claim 100% capital expenditure deductions face ATI inflation in the first year of the asset.
• Start-up LLPs under Section 80IAC: Eligible start-ups with a Section 80IAC exemption still pay AMT on the exempt income if the entity is a firm or LLP.
• IFSC fund administrators: LLPs in GIFT City pay AMT at 9%, not 18.5%, but AMT exposure is still real if income in convertible foreign exchange qualifies under the residual provisions.
• Professional practices claiming Section 80JJAA: Employers aggressively growing headcount may claim meaningful 80JJAA deductions, pushing ATI above regular taxable income.

Common Mistakes and Pitfalls to Avoid

1. Confusing ATI with gross income. ATI is a computed figure starting from regular taxable income. If you have carry-forward losses already set off in arriving at total income, those set-offs are retained — you do not add them back unless they relate to a 35AD set-off specifically.

2. Omitting Form 29C and filing the ITR directly. This is a defective return. File Form 29C first, then proceed to file ITR-5 or ITR-3.

3. Including Section 80C/80D in the add-back. These are "B" category deductions, not "C" category. Adding them back inflates ATI and overstates AMT. This is a computation error that can lead to paying more tax than required.

4. Ignoring the ₹20 lakh threshold for individuals. Many practitioners automatically apply AMT to all old-regime individuals with large deductions. If ATI is below ₹20 lakh, AMT simply does not apply.

5. Applying 18.5% to a GIFT City LLP without checking the foreign exchange condition. The 9% rate is not automatic — it requires that income be derived solely in convertible foreign exchange. Mixed-income structures lose the concessional rate.

6. Not modelling advance tax on AMT. AMT is treated as regular tax for advance tax purposes under Section 207. If you estimate AMT for the year, it must enter the advance tax calculations (15 June, 15 September, 15 December, 15 March), failing which interest under Sections 234B and 234C accrues on the shortfall.

7. Letting AMT credit lapse. A fifteen-year window sounds long, but LLPs that remain perpetually deduction-heavy — or that face regulatory changes affecting their income — may not generate sufficient regular tax. Model the credit utilisation trajectory every two to three years, not just at year-end.

8. Assuming AMT credit transfers on restructuring. AMT credit belongs to the assessee who paid it. An LLP that converts to an LLP with different partners, or dissolves and reconstitutes, cannot pass the credit forward to a successor entity. The credit is a personal tax asset of the original LLP.

Key Takeaways

• AMT = 18.5% × ATI (or 9% for qualifying IFSC units), paid when it exceeds regular income tax computed under normal provisions
• ATI adds back Section 10AA, Section 35AD (net of normal depreciation), and Chapter VI-A "C" category deductions (80IA series, 80JJAA, etc.) — but not 80C or 80D
• LLPs and firms face AMT regardless of income level; the ₹20 lakh threshold applies only to individuals, HUFs, AOPs, BOIs, and AJPs
• New tax regime individuals are effectively outside AMT because no qualifying deductions exist in that regime
• Form 29C must be obtained from a CA and filed before or with the ITR — skipping it renders the return defective
• AMT credit (Section 115JD) is real and recoverable, but only over fifteen assessment years and only in years where regular tax exceeds AMT — model it, do not assume it will automatically be absorbed
• Advance tax planning must incorporate AMT; treating it as a year-end adjustment exposes you to Sections 234B and 234C interest