In the complex landscape of taxation, Section 115JC of the Income Tax Act plays a crucial role in ensuring that individuals and entities, other than companies, pay a minimum amount of tax, even if their regular income tax liability is low due to various deductions. This provision, known as Alternate Minimum Tax (AMT), was introduced to prevent high-income individuals from reducing their tax liabilities to very low levels by claiming several deductions.
In this detailed guide, we will explore the key features of Section 115JC, how it applies to taxpayers, and its impact on individuals and entities in India.
What is Section 115JC of the Income Tax Act?
Section 115JC mandates that if the regular income tax payable by a person (other than a company) is less than the Alternate Minimum Tax (AMT), the adjusted total income will be considered as their total income, and they will be required to pay tax at a rate of 18.5%. This section ensures that even if a taxpayer has claimed several deductions and exemptions, they are still required to pay a minimum amount of tax to the government.
Key Features of Section 115JC
Let’s break down the important components of this section:
1. Alternate Minimum Tax (AMT) Applicability
Section 115JC applies to individuals, Hindu Undivided Families (HUFs), partnerships, and other entities that are not companies. If the regular income tax payable is less than the AMT calculated, then the adjusted total income becomes the total income, and the taxpayer must pay tax on this adjusted total income.
2. Tax Rate Under Section 115JC
The tax rate for persons falling under this section is 18.5% on the adjusted total income. This rate ensures that even after claiming deductions, a minimum tax is paid to the government.
3. Calculation of Adjusted Total Income
The adjusted total income is a key concept in understanding how AMT is calculated. It is the total income of the taxpayer before giving effect to the provisions of Chapter XII-BA, increased by the following:
- Deductions claimed under Chapter VI-A (under the heading “C-Deductions in respect of certain incomes”), excluding Section 80P.
- Deductions under Section 10AA: Any deductions claimed under this section, which relates to Special Economic Zones (SEZs).
- Deductions under Section 35AD: These are deductions related to specified businesses, but they are reduced by the depreciation allowed under Section 32. This ensures that any assets claimed under Section 35AD are accounted for as if no deductions were claimed on them.
4. Requirement of an Accountant’s Report
Taxpayers who fall under Section 115JC are required to obtain a report from an accountant (as defined under Section 288) before the specified date for filing tax returns (under Section 44AB). This report certifies that the adjusted total income and the AMT have been computed according to the provisions of this section.
5. Special Provisions for Specific Entities
- International Financial Services Centres (IFSCs): Units located in IFSCs that derive income solely in convertible foreign exchange are taxed at a reduced rate of 9% instead of 18.5%.
- Co-operative Societies: Co-operative societies are taxed at 15% under this section, providing some relief to such entities.
Exemptions from Section 115JC
There are certain situations where Section 115JC does not apply. These include:
- Option for Alternate Tax Regimes: Individuals or entities that have opted for the special tax regimes under the following sections are exempt from AMT:
- Section 115BAC (5): A new tax regime for individuals and HUFs, offering lower tax rates in exchange for foregoing certain exemptions and deductions.
- Section 115BAD (5): A special tax regime for co-operative societies.
- Section 115BAE (5): This section offers a concessional tax rate for new manufacturing companies.
- Income Computed Under Section 115BAC (1A): If the taxpayer’s income is computed under this section, the provisions of Section 115JC do not apply.
Why is Section 115JC Important?
The introduction of Alternate Minimum Tax under Section 115JC ensures that high-income earners cannot use deductions and exemptions to reduce their tax liability to negligible amounts. It creates a balance by ensuring that all taxpayers, including high-income individuals and entities, contribute a fair share of taxes, even after claiming various benefits under the Income Tax Act.
At the same time, it provides relief to certain sectors, such as IFSCs and co-operative societies, by offering lower tax rates. Additionally, taxpayers who opt for alternate tax regimes, like those under Section 115BAC, are exempted from AMT, providing flexibility in tax planning.
FAQs
1. What is Alternate Minimum Tax (AMT)? AMT is a minimum amount of tax that individuals, HUFs, and other entities, except companies, are required to pay if their regular income tax liability is lower than the AMT calculated under Section 115JC.
2. Who is required to pay tax under Section 115JC? Section 115JC applies to individuals, HUFs, and other entities, excluding companies, whose regular income tax liability is lower than the Alternate Minimum Tax (AMT) calculated.
3. What is the tax rate under Section 115JC? The tax rate is 18.5% of the adjusted total income. However, units in International Financial Services Centres (IFSCs) pay a reduced rate of 9%, and co-operative societies pay 15%.
4. Are there any exemptions from Section 115JC? Yes, individuals and entities that have opted for alternate tax regimes under Sections 115BAC, 115BAD, and 115BAE are exempt from AMT.
5. How is the adjusted total income calculated under Section 115JC? The adjusted total income is calculated by increasing the total income with deductions claimed under certain sections, such as Chapter VI-A, Section 10AA, and Section 35AD.
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Conclusion
Section 115JC serves as a safeguard in the Indian tax system, ensuring that all taxpayers pay a minimum level of tax, even after utilizing deductions and exemptions. For individuals and entities not covered by this section, alternative tax regimes like those under Section 115BAC provide options for lowering tax liabilities while staying compliant with the law.
Whether you are an individual taxpayer, a member of a co-operative society, or part of a business located in an IFSC, understanding the provisions of Section 115JC can help you navigate the tax system more effectively.
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