Minimum Alternate Tax (MAT): Meaning, Rates & Calculation

Written by : Knowledge Centre Team

2024-08-02

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A corporate tax is a tax on the profits of a company. So, what is the minimum alternate tax (MAT), then? The objective of MAT is to cover "zero tax companies" that do not pay taxes despite having made profits and paid dividends. They save on all payable taxes by availing of tax concessions and rebates as applicable under the Indian Income Tax Act.

What is MAT?

As companies avoided taxes using all possible rebates, the MAT was introduced. MAT is a provision in the IT Act to limit the exemptions and rebates availed by companies. With MAT, companies have to necessarily pay a minimum amount of tax to the government.

MAT: Which Companies must Pay?

As per section 115JB, every company has to pay MAT, if the tax (including surcharge and cess) on the total income, for the financial year is less than 15% of its book-profit + surcharge (SC) + health & education cess. As per Section 115JB, all companies must pay corporate tax at least equal to the higher of the following:

a) Normal Liability:

Tax computation on the taxable income by using tax rates applicable to the company. Tax computed using this method is termed normal tax liability.

b) MAT:

Tax computed @ 15% (plus surcharge and cess as applicable) on book profit. The tax computed using this method is called MAT.

How to Calculate MAT?

MAT is calculated at the rate of 15% of the book profit. Book profit is calculated in line with the provisions of Section 115JB of the Income Tax Act, 1961.

For example:

The taxable income of AB Services Pvt Ltd. is Rs. 28,40,000. The book profit of AB Services Pvt Ltd calculated as per the provisions of section 115JB is Rs. 18,40,000. What will be the tax liability of AB Services Pvt Ltd?

Normal tax for AB Services Pvt Ltd: Tax @ 30% on Rs. 28,40,000 = Rs. 8,52,000
MAT on book profit of AB Services Pvt Ltd @15% of Rs. 18,40,000 = Rs. 2,76,000.

The tax liability of a company is higher of:

Normal tax liability, and
Minimum Alternate Tax

Thus, the tax liability of AB Services Pvt Ltd will be Rs. 8,52,000, being higher than the MAT.

What is Book Profit for MAT?

As per section 115JB(2) "book profit" means the net profit as shown in the profit and loss statement prepared in accordance with Schedule III to the Companies Act, 2013. Some costs/income is considered along with the profit and loss statement when calculating the book profit.

Some major costs are listed below:

Income tax paid/payable and the provision for the same
Amounts moved to any reserves except those specified under Section 33AC
Provisions for unascertained liabilities
Provisions for losses incurred in subsidiary companies
Dividends paid/proposed
Expenditure related to incomes that are exempt under sections 10 [except section 10(38)], 11 and 12
The amount of expenditure related to, income, on which no income tax is payable is in line with provisions of section 86

Major deductions to book profit:

Amount withdrawn from reserves or provisions
Incomes that are exempt under sections 10, 11 and12 [except those under section10(38)]
Depreciation debited to profit and loss statement (excluding the depreciation on revaluation of assets)
Amount withdrawn from revaluation reserve such that it does not exceed the depreciation on revaluation of assets

What is MAT Credit?

MAT credit is the difference between MAT and the regular tax. This enables a company to carry forward the “extra” tax it pays under MAT (as against the regular tax liability) in a given financial year, to be utilised in future as a credit to offset its regular tax liability then.

Carry Forward of MAT Credit

You can opt for the carry-forward option in the assessment year in which the regular tax liability is greater than the MAT liability. The maximum MAT credit that you can claim cannot be greater than the difference between the regular tax and MAT. Unutilized MAT credit can be piled up for 15 years. If the company pays regular tax in a financial year, in future, it can utilize the MAT credit either partially or fully.

For example:

The regular tax liability of a company for FY 2018-19 is Rs. 8 lakhs while the liability under MAT is Rs. 8.4 lakhs. In this case, MAT is higher than the regular tax. Therefore, the company is eligible for MAT Credit in line with the provision in Section 115JAA.

MAT Credit = MAT – Regular Tax
= Rs.8.4 lakh – Rs. 8lakh
= Rs.40,000

MAT was introduced to limit the tax deductions/exemptions so that companies pay a “minimum” amount as tax to the government. The MAT operates with a “MAT credit” carry forward mechanism that allows a company to carry forward the “excess” tax paid due to MAT (as against its regular tax liability) in a financial year, to be utilised in future as a credit to offset its regular tax liability.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

FAQ

Income tax in India is based on incremental slab rates. The rate of tax is higher on higher income. You can also avail deductions from your taxable income if you invest in eligible instruments like PPF, NPS, ELSS, ULIPs, etc. Starting AY 2020-21 you have two tax regimes – old and new. The old tax regime has all the deductions from gross total income, while the new tax regime offers a lower rate of tax. So, if you are not investing in tax-saving instruments you can file your tax as per the new tax regime.

You can avail additional tax savings under the following sections other than section 80C:

a) Section 80D: Health insurance premium payments for family and parents up to Rs 75,000
b) Section 80CCD(1B): Self-contribution to NPS Tier-I account above 10% of salary or 20% of income if self-employed up to Rs 50,000
c) Section 80E: Education loan interest paid through the year
d) Section 80EE: Home loan interest paid up to Rs 50,000
e) Section 80G: Charitable contributions to non-profit organisations registered under section 12A up to 50% or 100% of the contribution
f) Section 24B: Interest paid on home loan

You have many tax-saving investment options. You can consider the following popular tax-saving schemes to save tax:

a) Term life insurance plan
b) Health and critical illness insurance plan
c) Life insurance plans such as endowment and moneyback plans
d) Pension plans from life insurance companies
e) Public Provident Fund (PPF)
f) National Pension System Tier-I account (NPS)
g) Employee Provident Fund (EPF)
h) Unit Linked Insurance Plans (ULIPs)
i) Equity Linked Savings Scheme (ELSS)
j) Senior Citizen Savings Scheme
k) Sukanya Samriddhi Yojana
l) 5-Year Tax Saving Fixed Deposits
m) National Savings Certificate (NSC)

Deduction of Rs 1.5 or 2 Lakhs under section 80C is available when you make investments or spend money under the heads mentioned in the Chapter VI A of the Income Tax Act, 1961. All tax-saving investments like PPF, NPS, ULIP, ELSS, etc. and all tax-saving expenses like children’s tuition fees, and registration expenses of a house property are part of Chapter VI A.

You will need to pay taxes on the incomes and gains from your investments. For example, your salary income is Rs 10 lakhs in a year, out of which Rs 7.5 lakhs becomes taxable after deducting exempt perquisites. Out of your income of Rs 10 lakhs, you invest Rs 3 lakhs in various options.

Even if none of your investments is eligible for tax saving under section 80C, your taxable income will remain Rs 7.5 lakhs. However, returns from some of these investments will become taxable in the next financial year when you receive them.

Since AY 2020-21 you have two ways to lower your income tax outflow on higher income – tax-saving investments and a new tax regime. You can stick to the old tax regime and invest your savings into eligible tax saving options. Tax-saving investments can give you a deduction of up to Rs 2 lakhs under sections 80C and 80CCD(1B), and additional deductions of up to Rs 2 lakhs under section 24.

Your deductions will be higher with other sections like 80E and 80G. But these are specific outflows which are not investments.

The best way to reduce your tax outflow legally is to use tax-saving investments and plan your future taxes carefully. Tax-saving investments will help you reduce your taxable income in the present financial year. If you invest in options which enjoy tax exemptions on maturity values, you can also reduce your future tax outflow. For example, Invest 4G ULIP from Canara HSBC Life Insurance allows you to stay invested up to the age of 99. This means that you can start investing at 30, build a corpus by 60 and have a tax-free lifetime pension.

Usually, a receipt is a convenient document to produce while claiming your deductions for expenses. However, the following alternatives are available if you lose the receipt:

a) Avail fuel or petrol expenses with number of kilometres
b) Credit card statement for computer items
c) Credit/debit card statement for stationery items
d) Membership documents to show running membership to claim the fees amount

You can claim HRA exemption with your employer and declare the amount in your ITR-1 form while filing your tax return. You will need to submit your house rent receipts with your employer to reduce your TDS. Use the online calculator to estimate your HRA exemption and claim the amount directly in your ITR.

If you are self-employed or do not receive HRA from your employer but have been paying rent for residence, you can claim a deduction of up to Rs 60,000 under section 80GG.

You can calculate your HRA exemption based on the following conditions. The amount of exempt HRA will be the lowest of the three:

a) HRA you have received
b) 50% of salary (basic + DA + Commission paid as % of turnover) if you are staying in a metro city otherwise 40%
c) Rent paid over 10% of your salary (as defined in step 2)

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Tax Savings - Top Selling Plans

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