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Tax Laws and Practice · Computation of Total Income and Tax Liability of various Entities

Computation of Total Income of Companies and MAT

Updated 11 October 2026 · Fact-checked

A company's total income is found by computing income under each head, setting off losses and allowing deductions, as for any assessee. Tax is then charged at the rate of the regime the company is under. If that tax is less than 14% of book profit, section 206 (MAT) makes the company pay 14% of book profit.

Understand Computation of Total Income of Companies

A company is taxed on its total income like any other assessee. You compute income under the heads (business income, capital gains, house property, other sources), set off and carry forward losses, claim deductions, and apply the rate. The rate depends on whether the company is domestic or foreign, and on whether a domestic company has chosen a concessional regime.

The tax rate is only the last step. Most marks go to getting the total income right, especially business income, where depreciation and disallowances matter.

Some companies show high accounting profit but low taxable income because of deductions and depreciation. Minimum alternate tax (MAT) in section 206 stops this. If the tax on total income is less than the MAT, the book profit is deemed to be the total income, and the company pays tax equal to MAT.

For tax years from 1 April 2026, the MAT rate is 14% of book profit (it was 15%). A unit in an International Financial Services Centre earning solely in convertible foreign exchange pays 9%. Book profit starts with the profit in the statement of profit and loss, prepared under Schedule III to the Companies Act, 2013 (or the Act governing the company), and is then increased and reduced by the items listed in section 206(1)(c) and (d).

MAT does not apply to a company that has exercised the concessional-regime options referred to in section 206(1)(q) (under sections 200(5) and 201(2)). It also does not apply to certain foreign companies, for example one with no permanent establishment in India under a tax treaty (section 206(1)(l)). From 1 April 2026 no new MAT credit arises. Only the credit already brought forward as on 31 March 2026 under the old law can be used, within 15 tax years.

Key rules to remember

MAT payable
MAT = 14% × Book profit
9% for an IFSC unit earning solely in convertible foreign exchange. Add surcharge and cess as applicable.
When MAT applies
If tax on total income < MAT, tax payable = MAT
Book profit is deemed to be total income. Otherwise normal tax is payable.
Book profit
Book profit = Profit per statement of profit and loss + additions under section 206(1)(c) − deductions under section 206(1)(c) ± adjustments in section 206(1)(d)
Start from the profit prepared as per Schedule III (or the Act governing the company).
Main additions
Income-tax and its provision + transfers to reserves + provision for unascertained liabilities + provision for losses of subsidiaries + dividends paid or proposed + depreciation + deferred tax + provision for diminution in value of assets
Add only if debited to the statement of profit and loss.
Main reductions
Withdrawal from reserves or provisions (already added earlier) + depreciation (excluding that on revaluation) + withdrawal from revaluation reserve (up to revaluation depreciation) + deferred tax credited + lower of brought forward loss (excluding depreciation) and unabsorbed depreciation
If either the loss or the unabsorbed depreciation is nil, nothing is reduced under this item. The loss and depreciation are taken as per the books.
Brought forward credit: domestic company with concessional option
Set-off in a year ≤ 25% × tax payable on total income
For credit brought forward as on 31 March 2026. The balance is carried forward, up to the fifteenth tax year after the year it first arose.
Brought forward credit: foreign company
Set-off ≤ Regular tax − MAT for that year
Allowed only when regular tax exceeds MAT, within the same 15-year limit.

How to solve Computation of Total Income of Companies questions

Use this order for any question on a company's total income and tax.

  1. 1Identify the company: domestic or foreign, and whether it has opted for a concessional regime. This decides the rate and whether MAT applies.
  2. 2Compute income under each head, apply set-off and carry forward of losses, and arrive at gross total income.
  3. 3Deduct the allowed deductions to get total income, and round it as the question requires.
  4. 4Apply the tax rate for the regime and add surcharge and cess if the question asks for them.
  5. 5If MAT can apply, compute book profit: start with the profit per the statement of profit and loss, add the section 206(1)(c) items debited, and subtract the items credited or allowed.
  6. 6Compute MAT at 14% of book profit (9% for an IFSC unit) and compare it with the normal tax.
  7. 7Pay the higher of the two. Then deal with brought forward MAT credit, if any, using the limit for that type of company.
  8. 8Write a clear conclusion: the tax payable and the credit carried forward, citing section 206.

Quickest way: Two-column MAT check

When to use it: Use it when a question gives both profit and loss account figures and tax computation figures, and asks for tax payable.

  1. Make two columns: normal tax and MAT. Finish the normal tax first.
  2. In the MAT column, list only the items debited to the profit and loss account that the section adds back. Ignore items that are not debited there.
  3. Check depreciation: the add-back and the reduction cancel out except for depreciation on revaluation.
  4. Reduce brought forward loss only if both loss and unabsorbed depreciation exist, and take the lower figure.
  5. Multiply by 14%, compare, and state the higher figure as tax payable.

Common mistakes in Computation of Total Income of Companies

  • Using 15% as the MAT rate.

    Older books and notes show 15%.

    Fix: For tax years from 1 April 2026 use 14% under section 206(1)(b)(ii), and 9% only for the IFSC unit case.

  • Starting book profit from taxable income instead of the profit in the statement of profit and loss.

    Students carry the normal computation over to MAT.

    Fix: Begin with the accounting profit as per Schedule III and then make the section 206 adjustments.

  • Adding back an item that was not debited to the statement of profit and loss.

    Students add back every reserve or provision named in the question.

    Fix: Each addition applies only if the amount is debited to the statement of profit and loss. Check the wording.

  • Reducing the full brought forward loss and the full unabsorbed depreciation.

    Students think both are allowed.

    Fix: Reduce only the lower of the two (loss excluding depreciation, and unabsorbed depreciation), as per books. If either is nil, reduce nothing.

  • Creating fresh MAT credit for the excess of MAT over normal tax in 2026-27 or later.

    Students remember the old rule of credit under the earlier law.

    Fix: The credit clauses were omitted from 1 April 2026. Only credit brought forward as on 31 March 2026 can be used.

  • Applying MAT to a company that opted for a concessional regime.

    Students apply MAT to every company.

    Fix: Check section 206(1)(q). The company that has exercised the option is outside MAT, but its old credit can be set off up to 25% of tax payable.

Worked examples

Example 1

Z Ltd, a domestic company not under any concessional regime, has a profit of ₹5,00,00,000 in its statement of profit and loss for the tax year. It was debited with: provision for income-tax ₹1,20,00,000; depreciation ₹60,00,000 (none on revaluation); transfer to general reserve ₹40,00,000; provision for unascertained liability ₹10,00,000; proposed dividend ₹30,00,000. It was credited with ₹15,00,000 withdrawn from a reserve (book profit was increased earlier by that reserve). Brought forward loss (excluding depreciation) as per books is ₹25,00,000 and unabsorbed depreciation is ₹40,00,000. Compute the book profit and MAT, ignoring surcharge and cess.

Show the solution
  1. Start with the profit per statement of profit and loss: ₹5,00,00,000.
  2. Add the items debited: income-tax provision ₹1,20,00,000; reserve transfer ₹40,00,000; provision for unascertained liability ₹10,00,000; proposed dividend ₹30,00,000; depreciation ₹60,00,000. Total additions = ₹2,60,00,000. Sum = ₹5,00,00,000 + ₹2,60,00,000 = ₹7,60,00,000. Depreciation is added back only here, once.
  3. Reduce: withdrawal from reserve ₹15,00,000; depreciation debited ₹60,00,000 (none is on revaluation, so the whole amount is reduced); and the lower of ₹25,00,000 (loss) and ₹40,00,000 (unabsorbed depreciation) = ₹25,00,000. Total reductions = ₹1,00,00,000. The depreciation add-back and reduction cancel each other.
  4. Book profit = ₹7,60,00,000 − ₹1,00,00,000 = ₹6,60,00,000.
  5. MAT = 14% × ₹6,60,00,000 = ₹92,40,000.

Answer: Book profit is ₹6,60,00,000 and MAT is ₹92,40,000 (before surcharge and cess). If the tax on Z Ltd's total income is lower, it pays ₹92,40,000 under section 206(1)(a). No fresh MAT credit arises for the excess, because the credit clauses were omitted from 1 April 2026.

Example 2

A Ltd, a domestic company, has opted for a concessional regime under the options referred to in section 206(1)(q). It has MAT credit of ₹40,00,000 brought forward as on 31 March 2026 under the old law. The tax payable on its total income for the tax year is ₹60,00,000. How much credit can it set off, what tax does it pay, and what is carried forward?

Show the solution
  1. Because the company has exercised the option, MAT does not apply to it (section 206(1)(q)). Section 206(3) governs its old credit.
  2. The set-off is limited to 25% of the tax payable on total income: 25% × ₹60,00,000 = ₹15,00,000.
  3. Credit available is ₹40,00,000, which is more than ₹15,00,000. So set off ₹15,00,000.
  4. Tax payable after credit = ₹60,00,000 − ₹15,00,000 = ₹45,00,000.
  5. Credit carried forward = ₹40,00,000 − ₹15,00,000 = ₹25,00,000. It cannot be carried forward beyond the fifteenth tax year after the year in which it first became allowable.

Answer: A Ltd sets off ₹15,00,000, pays ₹45,00,000 and carries forward ₹25,00,000 of credit, subject to the 15-year limit in section 206(3).

Exam tips

  • Write the section 206 steps in order: book profit, MAT, comparison, conclusion. Step marks are given even if the final figure is slightly off.
  • State the MAT rate at the start of the answer and mention the 9% rate for the IFSC unit if the question involves one.
  • Read each reserve or provision for the word 'debited'. If it is not debited to the statement of profit and loss, do not add it.
  • In theory questions, list who is outside MAT: companies that opted for concessional regimes, and certain foreign companies, with the reason.
  • Finish with a one-line conclusion giving tax payable and credit carried forward, if any.

Practice questions from Computation of Total Income and Tax Liability of various Entities

Computation of Total Income of Companies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Computation of Total Income of Companies: frequently asked questions

What is the MAT rate for companies under the Income-tax Act, 2025?

Under section 206(1)(b), MAT is 14% of book profit for a company, for tax years from 1 April 2026. For an IFSC unit that earns solely in convertible foreign exchange, it is 9%. Surcharge and cess are added as applicable.

Does MAT apply to every company?

No. It does not apply to a company that has exercised the concessional-regime options referred to in section 206(1)(q). Section 206(1)(l) also exempts certain foreign companies, such as those with no permanent establishment under a treaty.

Can I still carry forward MAT credit?

Only credit brought forward as on 31 March 2026 under the old law. A domestic company with the concessional option can set off up to 25% of tax payable each year. A foreign company can set off the excess of regular tax over MAT. Both are limited to the fifteenth tax year after the credit first arose.

Do I add depreciation to book profit?

Depreciation debited to the statement of profit and loss is added. The depreciation debited, excluding that on revaluation of assets, is then reduced. So, in most cases the net effect is only the depreciation on revalued assets, partly offset by the revaluation reserve withdrawn.