Minimum Alternate Tax (MAT): Eligibility and Calculation

What Is MAT?

In the past, there have been cases where companies generated income during the financial year but got away with paying minimal tax or no tax at all. In fact, these companies could manage to do this by taking advantage of tax provisions like exemptions, depreciation, and deductions under the Income Tax Act.

To address this problem of tax avoidance by companies, the central government introduced the minimum alternate tax (MAT). To increase the government’s tax revenues, MAT was introduced by the Finance Act, 1987, with effect from Assessment Year 1988-89. It was later withdrawn by the Finance Act, 1990, and then reintroduced by the Finance (No. 2) Act, 1996, from 1 April 1997. These provisions apply to companies incorporated under the Companies Act.

So, what is minimum alternate tax? MAT is a fixed tax that companies pay on profits, even when deductions and exemptions reduce their taxable income significantly.

MAT Calculation

MAT calculation takes into account a company’s book profits. Book profits need to be calculated in a manner prescribed under the rules of the Income Tax Act. After that is done, a certified chartered accountant has to prepare a report in Form 29B. The form has to be submitted prior to the filing of income tax returns.

According to the Finance Bill, 2026, MAT will be levied at 14% of book profits, plus surcharge (if applicable) and cess at 4%. If this amount is greater than the income tax calculated under normal provisions, then MAT becomes payable. Otherwise, tax is payable as per normal provisions.

It is to be noted that previously the MAT was 15%.

Which Companies Are Liable To Pay MAT?

Minimum Alternate Tax is covered under Section 115 JB and is applicable to all Indian companies, irrespective of whether they are private or public. Foreign companies can also fall under the ambit of MAT depending on the case.

The general rule regarding MAT is that it applies to companies that make profits according to their books of account but pay negligible tax under ordinary rules because of deductions and exemptions.

MAT can apply to foreign companies as well in certain cases. If a foreign company has a permanent presence in India or doesn’t take relief under a Double Taxation Avoidance Agreement or similar provisions, then MAT may apply to it too.

Exclusions From MAT

• Concessional tax regimes
  

Companies that opt for Sections 115BAA or 115BAB are not subject to MAT.

• Life insurance companies
  

Companies engaged in life insurance business are exempt due to their separate taxation framework.

• Shipping companies under tonnage taxation
  

Companies taxed under the tonnage scheme are outside the MAT provisions.

Tax Planning Under MAT

Units operating in an International Financial Services Centre and earning income in foreign currency are subject to a concessional MAT rate of 9% on book profits.

After that, tax planning under MAT was more about managing its impact than avoiding it. Typically, companies would review their adjustments to book profits, MAT credit availability, and compare liabilities with both methods every year.

With the changes introduced under the Finance Bill 2026, there appears to be a clear shift. The focus is moving toward concessionary tax regimes like Section 115BAA, under which minimum alternate tax stands fully exempt. MAT, with effect from 1 April 2026, has become a non-creditable tax. Consequently, no new MAT credit can accrue or be carried forward. This is a major shift, as MAT would play an even lesser role in long-term tax planning.

What Is MAT Credit?

It is important to understand what MAT credit is, or rather, was. A company had to pay the higher of its normal tax liability or its liability according to the MAT provisions. In a year that the company paid its liability as per MAT, it could make a claim of credit of MAT paid over and above its normal tax liability in the immediately following year(s). This tax credit would be up to the difference between the normal tax and the MAT calculated. There was also a provision to give credit for tax paid overseas, i.e., foreign tax credit.

However, with effect from 1 April 2026, MAT is proposed to become a final tax, and no new MAT credit will be allowed to accrue. Existing MAT credit accumulated up to 31 March 2026 can still be utilised, but only up to 25% of the tax liability in a given year.

Carry Forward Period For MAT Credit

MAT credit could be carried forward for up to 15 years. This provided companies with a relatively longer period to set off any excess MAT paid with normal tax liability. However, with the Finance Bill 2026, MAT credit utilisation is now restricted. The company can set off MAT credit up to 25% of its liability. This might limit the ability to completely utilise MAT credit within the allowed period.

Conclusion

Minimum alternate tax was introduced to ensure that companies reporting profits paid at least some tax. That objective still holds, but the framework has changed meaningfully with the Finance Bill 2026.

With MAT becoming a non-creditable tax and limits placed on the use of existing MAT credit, its role in long-term tax planning has reduced. Earlier, companies could carry forward MAT credit and optimise tax liability across years. That flexibility is now largely removed, making MAT more of a one-time tax outflow rather than a planning tool.

At the same time, the shift towards concessional tax regimes has changed how companies approach their tax position.

Going forward, the real question is whether MAT applies at all. Companies will need to assess their tax regime, available MAT credit, and cash flow impact before deciding the way ahead.

Sources

The Economic Times