By CA Surekha Ahuja
The Union Budget 2026 introduces a major structural reform of the Minimum Alternate Tax (MAT) regime, fundamentally changing its purpose, usage, and strategic implications for domestic and foreign companies.
The key focus is how accumulated MAT credit is now restricted, the 25% usage cap upon transition, and carry-forward limitations, which require careful planning before moving from the old regime to the new tax regime. The amendments also close the historical “hidden path” that allowed companies to indefinitely defer cash outflow through MAT credits.
MAT – Pre-Budget Overview
Prior to Budget 2026:
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Applicability: Domestic companies under old regime; prescribed foreign companies.
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Rate: 15% (domestic/foreign), 9% for IFSC units (subject to conditions), plus surcharge & cess.
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MAT Credit: Excess MAT paid over normal tax could be carried forward for 15 years and set off against normal tax exceeding MAT.
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Strategic Use: Companies could remain under the old regime to accumulate MAT credit, deferring cash outflows—a major “hidden path” for corporate tax planning.
Observation: MAT acted as a timing-difference levy, allowing deferred monetization of taxes while optimizing cash flow.
Budget 2026 – Key Amendments
| Feature | Amendment | Implication |
|---|---|---|
| MAT as Final Tax | MAT under old regime from FY 2026–27 is final | No new MAT credit; eliminates deferred recovery |
| MAT Rate | 15% → 14% | Partial relief on cash outflow, especially for foreign companies |
| Accumulated MAT Credit – Domestic Companies | Can be used only upon transition to the new regime; usage capped at 25% of current year tax liability | Forces strategic planning on when and how much credit to utilize |
| Carry-Forward Limitation | Carry-forward is allowed for up to 15 years, but only for the portion of MAT credit actually utilized in the transition year | Remaining unused MAT credit beyond 25% cap cannot be carried forward |
| Foreign Companies | Full accumulated MAT credit till 31 Mar 2026 can be used without cap; carry-forward up to 15 years | Transition timing less critical; easier credit monetization |
| Scope | Corporate assessees only; AMT for non-corporates unchanged | Non-corporates outside the reform |
Clarification: For domestic companies, carry-forward does not apply to the full accumulated MAT credit, but only to the fraction actually used during the year of transition to the new regime. Any portion exceeding the 25% cap cannot be carried forward and is effectively lost.
Government Intent
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Simplification:
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Eliminates dual computation (book profits vs taxable income), reducing compliance and litigation risks.
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Encouraging Migration to New Regime:
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By restricting MAT credit utilization, companies are incentivized to transition from the old regime.
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Fiscal Certainty:
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Limits deferred tax liabilities and improves predictability of government receipts.
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Closing Loopholes:
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Companies could previously remain in the old regime indefinitely, accumulating MAT credits while leveraging exemptions.
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Budget 2026 closes this pathway, ensuring MAT functions as a final, predictable tax.
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Impact – Domestic Companies
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Transition Timing:
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Early transition (FY 2025–26): MAT credit cannot be used; accumulated credit may be lost.
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Transition in FY 2026–27: Only 25% of current year’s tax liability can be offset; unused credit beyond 25% is lost.
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Cash Outflow vs Total Tax Liability:
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Pre-Budget: MAT credit could minimize cash outflows.
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Post-Budget: MAT is final, and only partial credit reduces cash outflow, increasing net cash requirement.
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Carry-Forward Limitation:
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Carry-forward allowed only for the portion of MAT credit actually used in the transition year.
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Example: If a company has ₹10 Cr MAT credit and can use only ₹2.5 Cr in transition year (25% cap), carry-forward is allowed for ₹2.5 Cr only. The remaining ₹7.5 Cr cannot be carried forward.
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Sectoral Considerations:
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SEZ, IFSC, and other incentivized units often hold high MAT credits; transition planning is critical to avoid substantial cash outflow shocks.
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Impact – Foreign Companies
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Full MAT credit utilization allowed; carry-forward up to 15 years.
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Reduced MAT rate (14%) lowers immediate cash outflow.
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Timing of transition is less critical, but credit computation must be precise.
Key Factors for Transition Decision
| Factor | Consideration |
|---|---|
| Accumulated MAT Credit | High credit → delay transition to maximize 25% utilization |
| Current Year Tax Liability | Model cash outflow vs partial credit offset |
| Cash Flow Impact | Higher immediate outflow if majority of credit is blocked by cap |
| Business Model / Sector | SEZ, IFSC units disproportionately impacted |
| Compliance & Governance | Board approval required; maintain audit trail of calculations |
| Policy Alignment | Leverage reduced MAT rate and new regime benefits |
Illustrative Scenarios
| Company | MAT Credit Accumulated | Transition Year | Credit Utilized (25% cap) | Carry Forward | Cash Outflow | Observation |
|---|---|---|---|---|---|---|
| Domestic SEZ | ₹10 Cr | FY 2026–27 | ₹2.5 Cr | 15 years for ₹2.5 Cr | ₹7.5 Cr unrecoverable | Partial credit utilization; high cash outflow |
| Domestic Non-SEZ | ₹1 Cr | FY 2026–27 | ₹0.25 Cr | 15 years for ₹0.25 Cr | ₹0.75 Cr unrecoverable | Low impact; early transition feasible |
| Domestic – Early Transition FY 2025–26 | ₹5 Cr | FY 2025–26 | 0 | 0 | ₹5 Cr unrecoverable | Premature transition → forfeited credit |
| Foreign Company | ₹5 Cr | FY 2026–27 | 100% | 15 years | Cash outflow reduced by 14% MAT rate | Full credit set-off allowed; timing less critical |
Decision Insight:
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Companies with high accumulated MAT credit should delay transition to maximize partial utilization and carry-forward.
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Companies with low MAT credit can transition early to simplify compliance.
Caution Points
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MAT Credit Forfeiture Risk: Early transition before FY 2026–27 may result in loss of accumulated credit.
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25% Utilization Cap: Only a fraction of credit can be applied in transition year; plan multi-year cash flow.
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Sectoral Impact: SEZ/IFSC units may face large cash outflows; careful planning required.
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Governance & Documentation: Maintain audit trail, board approvals, and MAT credit calculations.
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Policy Monitoring: Follow CBDT FAQs and circulars for precise computation rules.
Conclusion
Budget 2026 transforms MAT into a final levy, fundamentally changing corporate tax strategy:
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Domestic companies: Must strategically plan transition year, partial credit utilization (25% cap), and cash outflows.
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Foreign companies: Full credit utilization remains; reduced MAT rate offers relief.
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Carry-forward now applies only to the portion of credit actually used in transition year—unused accumulated credit beyond 25% is lost.
Key Takeaway: MAT is no longer a deferred tax lever. The timing of regime transition, cash outflow modeling, and partial credit utilization strategy now determine the net corporate tax outcome. Companies must adopt a scenario-driven, analytical approach to optimize tax planning under the new framework.
