What Happened
- The Union Budget 2026-27 reduced the Minimum Alternate Tax (MAT) rate from 15% to 14% of book profits, while making MAT a "final tax" from April 1, 2026
- Companies in the old tax regime will no longer be allowed to use MAT credit set-offs against future tax liabilities going forward — a significant change from the existing 15-year carry-forward provision
- Under the new tax regime (Sections 115BAA/115BAB), MAT credit use has been capped at 25% of available credit per year
- The changes are expected to trigger one-time financial hits for select companies, particularly startups and power sector firms that had accumulated substantial MAT credits under the old regime
- The overhaul effectively pushes more companies toward the new concessional tax regime by making the old regime less attractive
Static Topic Bridges
Minimum Alternate Tax (MAT) — Section 115JB of the Income Tax Act
Minimum Alternate Tax was introduced in India in 1987 (and later restructured under Section 115JB in 2000) to ensure that companies reporting significant book profits but paying zero or minimal tax through various exemptions and deductions still pay a minimum level of tax. MAT is computed on "book profit" — the net profit as shown in the profit and loss statement prepared under Schedule III of the Companies Act, 2013, adjusted by prescribed additions and deductions. If a company's tax liability under normal provisions is less than the MAT amount, the company is required to pay MAT.
- MAT under Section 115JB: applies to all companies (except those opting for Sections 115BAA/115BAB)
- Rate trajectory: 7.5% (1987) → 10% (2000) → 15% (post-2007) → 18.5% (2010-2019) → 15% (AY 2020-21 onwards) → 14% (Budget 2026)
- Book profit = Net profit as per P&L + prescribed additions (income tax provisions, depreciation, etc.) - prescribed deductions (loss brought forward, unabsorbed depreciation, etc.)
- MAT applies to companies as a concept; for non-corporate taxpayers, the equivalent is Alternate Minimum Tax (AMT) under Section 115JC
- International Financial Services Centre (IFSC) units: MAT rate of 9%
Connection to this news: The reduction to 14% while making MAT "final" fundamentally changes its character — from a temporary minimum tax (with future credit recovery) to a permanent tax floor, significantly impacting corporate tax planning strategies.
MAT Credit Mechanism — Section 115JAA
When a company pays MAT in excess of its normal tax liability, the difference is available as "MAT credit" under Section 115JAA. This credit could historically be carried forward for 15 assessment years (increased from 10 years by the Finance Act, 2017) and set off against future tax liability computed under normal provisions. The rationale was that MAT was a timing difference, not a permanent tax — companies would eventually recover the excess tax paid when their normal tax liability exceeded MAT. The Budget 2026 changes fundamentally alter this by: (a) disallowing future set-offs for companies in the old regime from April 2026, and (b) capping credit utilisation at 25% per year for companies in the new regime.
- MAT credit = MAT paid minus normal tax liability (when MAT > normal tax)
- Carry-forward period: 15 assessment years (Section 115JAA, post-Finance Act 2017)
- Companies under Sections 115BAA (22% tax rate, introduced in 2019) and 115BAB (15% for new manufacturing companies, introduced in 2019) are exempt from MAT altogether
- Accumulated MAT credits in the system for many companies run into hundreds of crores; startups and power companies (with accelerated depreciation) are particularly affected
- The 25% annual cap means even in the new regime, full credit utilisation will take a minimum of 4 years
Connection to this news: The restriction on set-offs creates a one-time write-off pressure for companies that had accumulated large MAT credits, potentially forcing them to transition to the new tax regime where the base rate (22% under 115BAA) is lower than the old regime's 30% but MAT credit recovery is now constrained.
New vs. Old Corporate Tax Regime — Sections 115BAA and 115BAB
The Taxation Laws (Amendment) Act, 2019 introduced Section 115BAA (effective tax rate of ~25.17% including surcharge and cess) and Section 115BAB (effective rate of ~17.16% for new manufacturing companies incorporated after October 1, 2019). Companies opting for these sections forgo most exemptions and deductions available under the old regime (30% base rate) but benefit from a lower headline tax rate and exemption from MAT. The choice between old and new regimes involves a trade-off between lower rates (new) versus deductions and exemptions (old, including MAT credit recovery).
- Section 115BAA: 22% base rate + 10% surcharge + 4% cess = ~25.17% effective rate; no MAT; must forgo most deductions
- Section 115BAB: 15% base rate for new manufacturing companies; no MAT; must commence manufacturing by March 31, 2024 (extended deadlines for specific cases)
- Old regime: 30% base rate (25% for companies with turnover up to Rs 400 crore) + surcharge + cess; eligible for exemptions under Sections 10AA, 80-IA, 80-IB, etc.; subject to MAT
- The new regime is optional and irrevocable once exercised (under 115BAA)
- Budget 2026 MAT changes make the old regime less attractive by eliminating future credit recovery
Connection to this news: By making MAT a final tax in the old regime and capping credit usage in the new regime, the budget creates strong incentives for remaining old-regime companies to migrate to the new concessional regime, furthering the government's objective of simplifying the corporate tax structure.
Key Facts & Data
- MAT rate reduced: 15% to 14% (Budget 2026-27)
- MAT made "final tax" from April 1, 2026 — no future set-offs in old regime
- New regime MAT credit cap: 25% of available credit per year
- Section 115BAA effective rate: ~25.17%; Section 115BAB: ~17.16%
- Old regime base rate: 30% (25% for turnover up to Rs 400 crore)
- MAT credit carry-forward period (pre-Budget 2026): 15 assessment years
- MAT first introduced: 1987; restructured under Section 115JB: 2000
- Sections 115BAA/115BAB introduced: Taxation Laws (Amendment) Act, 2019