What the End of MAT Credit Means for India Inc’s Balance Sheets

Union Finance Minister Nirmala Sitharaman on Sunday announced that the central government will be ending the Minimum Alternate Tax (MAT) credit from April 1, 2026, as part of their effort to “enable companies to shift to the new regime”. To further encourage the move, they have also proposed to make MAT a final tax and reduce the corresponding rate to 14%, compared to the current 15%.

The move, experts say, not only ends the mounting stock of unutilised MAT credits, it will also provide a modest “rise in effective tax rates from FY27 onward” for companies still using the older tax regime. These credits are assigned to companies who pay income tax under a special tax rule under Section 115JB of the Income Tax Act.

It was introduced in the late 90s to ensure that companies which show high profits in their books and pay dividends to shareholders but escape paying any taxes by applying various deductions and exemptions under normal income tax rules.

How MAT Credit Works?

While domestic companies generally pay 30% tax (or 25% if turnover is up to ₹400 crore), plus surcharge and 4% cess under the old tax regime, under MAT, they were charged at 15% of their “book profits”. It means the profit shown in the company’s profit and loss account, after making certain additions and deductions prescribed under the law. Additions include items like income tax paid, transfers to reserves, proposed dividends, depreciation (including on revalued assets), provisions for bad debts, deferred tax, and expenses linked to exempt income.

If a company ends up paying tax under MAT instead of the normal tax rules, it is allowed to claim MAT credit under Section 115JAA. This means the extra tax paid due to MAT can be carried forward and adjusted against future tax liabilities when the company’s normal income tax becomes higher than MAT.

However, the government in 2019 introduced a lower optional corporate tax regime through amendments to the Income-tax Act (notably Section 115BAA). It allowed companies to pay tax at a concessional rate of 22% (plus applicable surcharge and cess), though it didn’t provide them with various exemptions and incentives available in the normal tax regime. A year later, similar changes were brought to personal income tax as well.

It effectively created two parallel tax regimes for both individual taxpayers and corporates. While the majority of taxpayers have shifted to the new tax regime, especially after FM Sitharaman in the last Budget increased the minimum taxable income threshold to ₹12 lakh in the new tax regime, on the corporate side it’s another story.

“Official statistics indicate that nearly 42% of taxable corporate income still remains in the old regime, particularly among infrastructure, power, manufacturing and SEZ-linked entities that historically relied on deductions under Sections 80IA and 10AA, and these firms are the most exposed to potential credit stranding,” B. Shravanth Shanker, Managing Partner, B. Shanker Advocates LLP, told Outlook Business.

“The availability of this tax credit and the option to accumulate such credit in the old regime was one of the factors that encouraged a lot of companies to continue to operate under the old regime,” said SR Patnaik, Partner (Head – Taxation), Cyril Amarchand Mangaldas.

What Budget 2026 Changes MAT?

From tax year 2026–27, MAT will be treated as a final tax, meaning companies paying MAT will not be allowed to accumulate or claim MAT credit in future years. As part of this change, the MAT rate will be reduced from 15% to 14% for both domestic and foreign companies. Domestic companies that do not opt for a concessional tax regime will pay MAT as a final tax, with no MAT credit allowed.

That doesn’t mean the credits accumulated so far will go away. The carried-forward MAT credit will remain valid for 15 years from the year it first became available, after which it will lapse. Importantly, this set-off facility will be available only to domestic companies that move to the new regime. Companies that shift to the concessional tax regime from tax year 2026–27 onwards will be allowed to use their existing MAT credit accumulated up to 31 March 2026.

“This capped utilisation ensures that while companies eventually get the benefit of their old tax payments, the set-off is staggered over a minimum period of four years. If the normal tax liability is not high enough to accommodate this 25% draw-down, the unused portion continues to be carried forward, subject to the overall 15-year expiry limit originally established under the 1961 Act,” said Ankit Jain, Partner, Ved Jain & Associates.

For foreign companies, MAT credit set-off will be allowed only in years where normal tax exceeds MAT and only to the extent of the difference between the two. Foreign companies opting for a presumptive tax regime will be fully exempt from MAT.

However, there will be no change for IFSC units in GIFT City, which will continue to be taxed at 9%.

What It Means for Companies

Historically, MAT credit has been a significant balance sheet asset for specific industries that operate with long gestation periods or high capital intensity, including sectors such as infrastructure development, power generation, steel manufacturing, and cement production, notes Jain.

“Companies in these fields often benefit from accelerated depreciation or investment-linked incentives that lower their normal taxable income, but their robust book profits triggered substantial MAT liabilities,” he noted.

The MAT overhaul is modestly negative for near-term earnings but positive for market clarity, said Alay Razvi, Managing Partner, Accord Juris.

“Companies that stayed in the old regime to monetise accumulated MAT will see higher cash tax outgo in FY27, compressing EPS, particularly for capital-intensive and deduction-heavy firms,” Razvi said, further explaining that while the move may create short-term earnings drag and stock-specific volatility, it improves long-term tax certainty, normalises effective tax rates and reduces “balance-sheet distortions, which equity markets typically reward over time”.

In Budget 2026, the government has projected to collect ₹12.31 lakh crore in corporation tax in FY27, about 11% higher than the revised estimate of ₹11.09 lakh crore in FY26. Though it is still lower than tax collections from personal income (₹14.66 lakh crore), it is slightly higher compared to GST collection projections of ₹10.19 lakh crore.

According to Shanker, the proposal is not only clearly designed to accelerate migration to the concessional regime, it is also aimed “to curb the growing fiscal leakage caused by the mounting stock of unutilised MAT credits.”