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Quick Snapshot
A CFO walks into a meeting holding a spreadsheet. It shows Rs. 85 crore in accumulated MAT credit sitting on the balance sheet. She says: we can use this to offset our taxes over the next few years, right?
The answer used to be yes. From 1 April 2026, the answer is: only if you leave the old regime, and even then, only 25% per year.
Here is the plain truth about what the Finance Act 2026 did to MAT:
- The MAT rate was cut from 15% to 14%. That headline looked like a gift.
- Simultaneously, the Finance Act eliminated MAT credit generation entirely for domestic companies under the old regime. From Tax Year 2026-27, every rupee of MAT paid is a final, permanent tax cost. No credit. No recovery. Gone.
- Companies that have accumulated MAT credits up to 31 March 2026 can use them, but only if they switch to the concessional new regime (Section 200 or 201 of the 2025 Act, equivalent to old Sections 115BAA or 115BAB). And even then, they can use only 25% of their regular tax liability per year, not the full credit.
The 1% rate cut from 15% to 14% is, at most, a Rs. 1 saving per Rs. 100 of book profit. The loss of credit recovery is a permanent increase in tax cost for every company that continues paying MAT. The government did not simplify MAT. It made MAT a trap for companies that stay in the old regime, while dangling the accumulated credit as a carrot to force them into the new one.
Example: A manufacturing company pays Rs. 14 crore as MAT on Rs. 100 crore book profit in Tax Year 2026-27 under the old regime. Under the old system, this would have generated Rs. 14 crore in MAT credit to recover in future years. Under the new system, this Rs. 14 crore is a final tax. There is no credit. The company cannot recover this amount ever.
Under Income Tax Act 1961: Section 115JB of the Income Tax Act 1961 governed MAT. Section 115JAA governed MAT credit carry-forward. Under the Income Tax Act 2025, MAT is now governed by Section 206. Accumulated MAT credit from the 1961 Act is preserved as a transitional measure under Section 536(2)(l) of the 2025 Act, as amended by Finance Act 2026 (Act No. 4 of 2026, w.e.f. 1 April 2026). For domestic companies in the old regime, no new credit is generated from Tax Year 2026-27.
What MAT Was: A Quick Background
Minimum Alternate Tax was introduced to address a problem. Profitable companies were legally paying zero or near-zero income tax by claiming deductions, exemptions, and incentives. Their accounting profits were large, but their taxable income was small or nil.
MAT fixed this by saying: regardless of your normal tax computation, you must pay at least a minimum percentage of your book profit (profit as per your profit and loss account) as tax. If that minimum tax exceeded your normal tax, you paid MAT.
The credit mechanism made MAT bearable. When you paid MAT in a year, the excess of MAT over normal tax became a credit, called MAT credit, which you could carry forward for 15 years and use in any future year when your normal tax exceeded MAT. So MAT was not a permanent cost. It was a timing advance.
That character, as a timing difference and recoverable advance, has now ended for domestic companies remaining in the old regime.
What the Finance Act 2026 Changed: Section by Section
Change 1: Rate Cut from 15% to 14% (Footnote 28 to Section 206(1)(b))
Section 206(1)(b)(ii) of the Income Tax Act 2025 originally provided for MAT at 15% of book profit. Finance Act 2026 substituted this figure. From Tax Year 2026-27, MAT on book profit for domestic companies (other than IFSC units) is 14%.
For IFSC units, the rate remains 9%.
Change 2: Clauses (m), (n), (o), (p) Omitted (Footnote 31 to Section 206)
This is the central change and it received far less attention than the rate cut.
Clauses (m), (n), (o), and (p) of Section 206(1) were the MAT credit provisions for domestic companies under the old regime. They provided:
- Clause (m): credit for excess MAT over normal tax.
- Clause (n): no interest on tax credit; DTAA credit adjustment.
- Clause (o): carry forward and set off of MAT credit, up to 15 years.
- Clause (p): adjustment of credit on reassessment.
Finance Act 2026 deleted all four clauses. From 1 April 2026, there is no MAT credit mechanism under the old regime for domestic companies. MAT paid under the old regime is a final tax. It generates no credit. It cannot be recovered.
Change 3: Old MAT Credit Preserved via Section 536(2)(l) But Restricted
Finance Act 2026 omitted all MAT credit provisions from Section 206 of the Income Tax Act 2025. The old MAT credit mechanism does not survive in Section 206 itself. Instead, the statutory home for accumulated MAT credit recovery is Section 536(2)(l) of the Income Tax Act 2025, the transitional provisions, read together with the amended Section 206.
Section 536(2)(l) deems any MAT credit that was allowable to be carried forward under Section 115JAA of the 1961 Act to be an eligible credit under the Income Tax Act 2025. This preservation is available exclusively to domestic companies that have exercised the option under Section 200(5) (old Section 115BAA equivalent, 22% concessional rate) or Section 201(2) (old Section 115BAB equivalent, 15% for new manufacturing companies), for Tax Years beginning on or after 1 April 2026. Companies that remain in the old regime cannot use this credit at all, it is fully extinguished for them.
For eligible new-regime companies, the use of this carried-forward credit is restricted under the amended Section 206(3):
- The credit can be set off in any Tax Year to the extent of 25% of the tax payable on total income computed under the other provisions of the Act for that year. Not 25% of the credit balance. 25% of the current year’s regular tax.
- The remaining credit is carried forward to the next Tax Year.
- The carry forward and set off is not allowed beyond the 15th Tax Year immediately succeeding the Tax Year in which the credit first became allowable under Section 115JAA of the 1961 Act. The original 15-year clock continues to run from the year the credit was first generated — it does not restart on regime switch.
Example: A company has Rs. 60 crore of MAT credit as on 31 March 2026. It switches to the Section 200(5) concessional regime from Tax Year 2026-27. Its regular tax for Tax Year 2026-27 is Rs. 40 crore. Maximum MAT credit use = 25% of Rs. 40 crore = Rs. 10 crore. The remaining Rs. 50 crore is carried forward. Next year, the calculation repeats with 25% of that year’s regular tax. If some credits are approaching the 15-year limit, they may lapse before being fully used.
Change 4: Foreign Companies — Credit Preserved Under Section 206(4)
Foreign companies do not have the option to switch to the concessional tax regime. Finance Act 2026 accordingly inserted Section 206(4) specifically for them. For foreign companies, existing MAT credit as on 31 March 2026 (preserved via Section 536(2)(l)) can be carried forward and set off in any year when regular tax exceeds MAT, up to the 15-year limit from the year the credit first arose.
The 25% annual cap that applies to domestic companies does not apply to foreign companies. Their set-off is limited to the difference between regular tax and MAT in any given year — the standard pre-2026 mechanism — with the 15-year clock continuing to run from the original year of credit generation.
The Full Impact: Before and After
| Aspect | Before 1 April 2026 (Old Law) | From 1 April 2026 (Finance Act 2026) |
| MAT rate (domestic company, general) | 15% of book profit | 14% of book profit |
| MAT rate (IFSC unit) | 9% of book profit | 9% (unchanged) |
| MAT credit generation (old regime) | Excess MAT over normal tax becomes credit | No credit generated. MAT is final tax. |
| MAT credit carry forward (old regime) | Up to 15 years | No new credit. Nil carry forward from 2026-27. |
| Old credit (accumulated to 31 March 2026) use by domestic companies | Set off when normal tax exceeds MAT (no cap) | Preserved under Section 536(2)(l) only for companies switching to new regime. Capped at 25% of regular tax per year. Fully lost for companies staying in old regime. |
| Old credit use by foreign companies | Set off when normal tax exceeds MAT | Same rule continues under Section 206(4) |
| MAT applicability to new regime companies | Not applicable (no MAT for Section 115BAA/BAB companies) | Not applicable (no MAT under Section 200/201 regime) |
| MAT as timing difference or final cost | Timing difference (recoverable via credit) | Final permanent tax cost for old regime companies |
The 25% Cap: Why It Matters More Than It Looks
The 25% annual use cap seems reasonable until you do the arithmetic with real numbers.
Example: A company has Rs. 100 crore of MAT credit accumulated over the years. It switches to the new concessional regime. Its annual regular tax is Rs. 30 crore. Maximum MAT credit use per year = 25% of Rs. 30 crore = Rs. 7.5 crore. At this rate, it takes 13.3 years to use the full Rs. 100 crore, assuming no increase in tax liability. If the original MAT credit was earned in Tax Year 2015-16, the 15-year clock expires after Tax Year 2030-31. The company may use only Rs. 7.5 crore per year for 5 years (2026-27 to 2030-31) = Rs. 37.5 crore. The remaining Rs. 62.5 crore lapses. It is permanently lost.
This is not a fringe scenario. Companies with large, old MAT credit balances close to the 15-year expiry face permanent credit loss even after switching regimes. The government’s framing of the 25% cap as a transition mechanism understates its impact on companies with ageing credit balances.
Who Stays in the Old Regime and What They Face
Not every company can or will switch to the concessional regime. Companies with significant profit-linked deductions (SEZ profits, Section 80-IA deductions, accelerated depreciation, etc.) often find the old regime more favourable even at 25-30% rates because the deductions bring their effective tax significantly below the headline rate.
For these companies, the Finance Act 2026 position is stark:
- They continue to pay MAT at 14% when book profits are large and normal tax is low.
- No MAT credit is generated on these payments from Tax Year 2026-27.
- Every rupee of MAT paid is a permanent cash outflow, not a recoverable advance.
- The effective tax burden on book profits under the old regime increases because the credit relief no longer exists.
A company that paid Rs. 14 crore in MAT under the old law would have expected to recover Rs. 14 crore in future years when profits normalised and normal tax exceeded MAT. That expectation is now extinguished. The Rs. 14 crore is gone permanently.
The Regime Migration Calculus: What Companies Must Now Compute
Finance Act 2026 has effectively given every domestic company a forced decision point. The question is no longer just about current-year tax. It is a multi-year financial modelling exercise:
- How much accumulated MAT credit do we have as on 31 March 2026?
- When was this credit originally generated? How many years remain before it lapses?
- What is our projected regular tax under the new regime for the next 15 years?
- At 25% annual usage, how much of the credit can we realistically recover before it expires?
- What deductions do we lose by switching regimes, and does the MAT credit recovery compensate?
For many companies, the arithmetic will show that switching regimes and recovering partial MAT credit is better than staying in the old regime and paying MAT as a final tax. This is exactly the outcome the government intended. But the decision is company-specific, and the calculation is not simple.
Example: Company A has Rs. 40 crore MAT credit, all generated in Tax Years 2022-23 to 2024-25. Under the new regime with annual regular tax of Rs. 50 crore, it can recover Rs. 12.5 crore per year (25% of Rs. 50 crore). In the 10 years remaining before the oldest credit lapses (2037-38), it can recover the full Rs. 40 crore. Regime switch makes sense. Company B has Rs. 80 crore MAT credit, much of it from Tax Years 2011-12 to 2015-16. Large portions will lapse within 5 years regardless. Recovery is limited. The calculus is far less favourable.
The Book Profit Computation: Unchanged
Section 206(1)(c) of the 2025 Act retains the book profit definition unchanged. Book profit continues to mean profit as shown in the statement of profit and loss for the relevant Tax Year, prepared under the Companies Act, 2013, as adjusted by the additions and reductions listed in the section.
The key adjustments (additions to book profit) remain: income tax paid and provisions, reserves, provisions for liabilities, dividends, depreciation, deferred tax. Key reductions: amounts withdrawn from reserves, income exempt under Section 11, book depreciation (excluding revaluation), deferred tax credits, and brought-forward losses or unabsorbed depreciation, whichever is less.
The IFRS/Ind-AS adjustment mechanism under Section 206(1)(d)(ix) and the detailed tables for transition amounts also continue without change.
Alternate Minimum Tax: Unchanged
Section 206(2) (Alternate Minimum Tax for non-corporate persons: LLPs, individuals, HUFs claiming profit-linked deductions) is unchanged by Finance Act 2026. The rate remains 18.5% for non-IFSC cases. The AMT credit mechanism under Section 206(2)(e) to (i) continues. Finance Act 2026 changes apply only to the corporate MAT provisions in Section 206(1).
Accountant’s Certificate: Still Required
Section 206(1)(s) continues to require every company to which MAT applies to furnish a report from an accountant (CA) certifying that book profit has been computed as per the provisions of the section. This must be filed before the specified date under Section 63 or along with the return in response to a notice under Section 268(1). This requirement is unchanged.
Practical Compliance Checklist
- If your company is still in the old tax regime from Tax Year 2026-27: understand that MAT paid from this year onward is a final cost. No credit is generated. Factor this into your financial projections and pricing models.
- If you have accumulated MAT credit as on 31 March 2026: obtain a precise schedule of credit balances, the Tax Year in which each credit originated, and the year it will lapse. This is urgently needed for regime migration analysis.
- If you are considering switching to the Section 200(5) or 201(2) concessional regime: model the 25% annual cap against your projected regular tax liability for each of the remaining years before your oldest credit lapses. Do not assume full recovery.
- If you are switching to the concessional regime: the option must be exercised on or before the due date under Section 263(1) for filing the return of income. Under the Income Tax Rules 2026, this can now be done at the time of filing the return itself (the earlier requirement of filing a separate prescribed form has been removed).
- If your company is a foreign company: your MAT credit carry-forward rules under Section 206(4) are unchanged. You retain the standard excess-of-normal-tax-over-MAT mechanism without the 25% cap.
- Update your balance sheet disclosures: deferred tax asset recognised on MAT credit may need reassessment given the 25% cap and potential lapse risk. Discuss with your auditor before the Tax Year 2026-27 accounts are finalised.
In Summary
The Finance Act 2026 restructured MAT in a way that is more consequential than the headline rate cut suggests. Reducing MAT from 15% to 14% saved companies 1 rupee per 100 rupees of book profit. Eliminating the MAT credit mechanism for old-regime domestic companies cost them the ability to recover every rupee of MAT paid going forward. For companies with large accumulated credits approaching their 15-year expiry, the 25% annual cap on credit use in the new regime may mean a permanent write-off of a significant portion of their balance sheet asset.
The government’s intent is transparent: encourage domestic companies to migrate to the lower-rate concessional regime. The MAT credit hostage mechanism is the enforcement tool. Companies that migrate get to recover old credits, partially and slowly. Companies that stay face MAT as a permanent tax with no relief. The economic rational for staying in the old regime needs to be very strong indeed to justify this ongoing cost.
