Progressive Tax Systems: Marginal Vs. Effective Rates Demystified - Part III

5. How India’s Alternative Minimum Tax keeps generous deductions in check

1. AMT—concept, scope and headline rates

India borrowed the idea of a floor tax from the U.S. in 2012, grafting it onto Section 115JC to stop high-income, non-corporate taxpayers from vanishing behind a wall of incentives and profit-linked deductions. AMT is triggered only if a person’s “adjusted total income” (ATI) exceeds ₹20 lakh; below that line, ordinary slab rates apply and the whole regime switches off entirely ^[15].

Once ATI crosses the threshold, a flat 18.5 % plus surcharge and 4 % health-and-education cess is levied on the recomputed income, and the taxpayer must compare that figure with her normal tax. Special, politically motivated concessions exist: units operating in an International Financial Services Centre pay only 9 %, and co-operative societies saw their rate cut to 15 % in the 2023-24 Union Budget ^[16].

Crucially, companies remain outside this net because they already face a parallel regime—Minimum Alternate Tax (MAT) under Section 115JB. In practice, therefore, AMT primarily affects LLPs, partnerships, and high-earning individuals who claim heavy deductions under Sections 10AA, 35AD or 80-series incentives ^[17].

2. Comparing AMT with the normal computation—and the role of AMT credit

Each return season produces two competing tax bills. Step 1: compute regular tax under the slab system after deductions; Step 2: add back the specified reliefs to arrive at ATI and apply the AMT rate. If the AMT figure is higher, it becomes the payable tax; if lower, the normal tax prevails.

For example, an LLP with ₹5 crore ATI and ₹2 crore regular taxable income owes ₹92.5 lakh under AMT versus ₹60 lakh under the 30 % corporate-like slab—hence it must remit the higher amount ^[18]. The sting is softened by Section 115JD, which treats the excess AMT as a credit that can be carried forward for up to 15 assessment years and set off whenever normal tax once again exceeds AMT ^[19].

No interest is paid on this credit, and it lapses if the taxpayer jumps to the concessional “new tax regime” under Section 115BAC, where AMT is altogether inapplicable ^[20].

6. Handling Taxes When You Work for Yourself—or Pay Others—in India

1. Self-employment taxes in India

India does not impose a stand-alone “self-employment tax” resembling U.S. Social Security or Medicare. Instead, freelancers, gig-workers, and sole proprietors remit regular income tax at the slab rates and, if their final annual liability is projected to exceed ₹10,000, must also pay quarterly advance tax under sections   208–211 of the Income-tax Act.^[21] Books of account are compulsory unless the taxpayer opts for presumptive taxation under sections   44AD (traders) or 44ADA (professionals) where profits are deemed at 6–8 percent of turnover.

Crossing the goods-turnover threshold of ₹40 lakh—or ₹20 lakh for service providers—triggers mandatory GST registration and periodic GST returns, even for solo entrepreneurs.^[22] State professional-tax rules add one more layer: most states levy up to ₹2,500 per year, deducted monthly but ultimately borne by the self-employed individual.

Although there is no employer to handle withholding, digital payment portals now let freelancers deposit TDS generated by platform clients directly against their PAN, easing credit reconciliation at filing time. Staying mindful of these multiple triggers—income slabs, advance-tax milestones, GST turnover, and state imposts—prevents an unpleasant surprise when the assessment order arrives.

2. Payroll withholdings when you employ others

The moment you hire staff—even one domestic helper on your books—you switch hats from taxpayer to tax-collector. Employers must calculate and deduct Tax Deducted at Source (TDS) each month using employees’ projected annual income and applicable exemptions; non-remittance attracts interest at 1 percent per month and a 100 percent penalty. Beyond TDS, statutory social-security levies loom large.

The Employees’ Provident Fund requires 12 percent of basic salary from both employer and employee, with 8.33 percent of the employer share funneled into the Employees’ Pension Scheme.^[23] For workers earning up to ₹21,000, Employees’ State Insurance contributions add 3.25 percent from the employer and 0.75 percent from the employee, payable by the 15th of the following month.^[24] Most states also mandate professional tax deductions that top out at ₹200 per month.^[25] Coupled with gratuity, bonus, and Labour Welfare Fund dues, these withholdings can push the statutory cost of an employee 25–30 percent above take-home pay.

Robust payroll software—or an outsourced Professional Employer Organisation—is therefore more necessity than luxury for small businesses that wish to avoid cascading late-fee notices.

3. Estimated (advance) tax payments

For taxpayers with uneven or non-salary income—consultants paid per project, landlords waiting on rent arrears, or equity traders riding the market—India’s advance-tax calendar is the primary shield against interest under sections   234B (default) and 234C (deferment).

Four instalments carve the fiscal year: 15 percent of total liability by 15   June, 45 percent cumulatively by 15   September, 75 percent by 15   December, and the full 100 percent by 15   March; payments up to 31   March still count as advance tax and avert 234B interest.^[26] If you elect presumptive regimes under sections   44AD or 44ADA, the complexity collapses—you may pay 100 percent in a single shot on or before 15   March.^[27] Modern e-filing portals allow one-click challans that auto-populate Form   26AS within hours, letting taxpayers reconcile credits while memories (and spreadsheets) are fresh.

Missing the benchmarks can snowball quickly: interest accrues at 1 percent per month, compounded from each due date, and the system now auto-computes these charges in the income-tax-return utility before you can even press “Submit.” Accurate forecasting—perhaps by staggering provisional invoices or skimming a fixed percentage off every payment into a dedicated tax wallet—has therefore become a vital cash-flow discipline for India’s growing army of independent earners.

References

1. [15] Bajaj Finserv – Section 115JC overview
2. [16] Tax Heaven – AMT rates and exceptions
3. [17] ClearTax – AMT basics and applicability
4. [18] CMA Knowledge – LLP case study
5. [19] ClearTax – AMT credit carry-forward up to 15 years
6. [20] Tax Robo – AMT interaction with new regime
7. [21] ClearTax – Advance Tax Guide
8. [22] Razorpay – GST Registration Limits
9. [23] Mint – Decoding Your Salary
10. [24] ClearTax – ESI Rates
11. [25] Juntrax – Payroll Tax Guide
12. [26] TaxHeal – Advance-tax Due Dates
13. [27] ClearTax – Advance Tax Guide