LLPs to Face Higher Taxes: LTCG Rate Rises from 12.5% to 18.5% Under New Income Tax Bill

Update on 29/07/2025

Recently, the Income Tax Department clarified via social media (twitter) that the Income Tax Bill, 2025 aims purely at simplifying legal language and eliminating redundant provisions, and it does not intend to alter existing tax rates, including those applicable to Long-Term Capital Gains (LTCG). The tweet also assured that any ambiguity in the provisions will be addressed during the Bill’s passage.

However, a closer reading of the revised draft, especially Section 206, and the Select Committee’s recommendations, raises certain concerns regarding the AMT framework and its broadened applicability. Previously, under the existing Section 115JEE of the Income-tax Act, AMT applied only to non-corporate assessees who claimed specified deductions such as those under Section 10AA, Section 35AD, or Chapter VI-A (Part C). Furthermore, it specifically excluded individuals, HUFs, AOPs, BOIs, and artificial juridical persons (AJPs) if their total income was below ₹20 lakhs.

In the revised proposal, however, the committee recommends inserting a new sub-clause stating that AMT shall not apply to individuals, HUFs, AOPs, BOIs, or AJPs if:

(a) they have not claimed deductions under Section 10AA, 35AD, or Chapter VI-A Part C; and

(b) their adjusted total income does not exceed ₹20 lakhs.

While this appears aligned with the earlier safeguard, it is significant to note that partnership firms and LLPs have been deliberately or by mistakenly excluded from this exemption in the committee’s draft language. This omission marks a conscious carve-out, signaling a policy shift. Unlike the earlier position under Section 115JEE, where all non-corporate entities could avoid AMT if they weren’t claiming specified deductions, the revised draft potentially brings LLPs and partnership firms earning only LTCG into the AMT net—raising their effective tax burden from 12.5% to 18.5%.

Therefore, while the tweet reassures that there is no intent to change tax rates, the legislative wording and exclusions in the revised draft suggest a subtle but impactful change. This underscores the need for clarity before the final enactment and for taxpayers—especially LLPs engaged in capital gains—to plan proactively.

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I recently discovered this issue when a client shared a newspaper clipping from The Economic Times with the headline: “First families of biz face higher tax on share sale profits.” It highlighted an increase in the effective tax rate for LLPs earning only capital gains—from 12.5% to 18.5%. Like many, I was initially shocked. After being asked to research the matter, it became clear that this change stems from less-publicized amendments in the Income-tax Bill, 2025—raising concerns about the growing trend of hidden legislative tweaks impacting taxpayers.

So, before delving into the issue and its implications, it’s important to first understand the core objective and foundational principles behind the concepts of Minimum Alternate Tax (“MAT”) and Alternate Minimum Tax (“AMT”).

Background

The MAT and AMT was introduced to bring corporates and non-corporates, especially those making substantial profits but paying little or no tax under normal provisions due to various exemptions and deductions, into the tax net. The introduction of MAT and AMT ensured that corporates and non-corporates also had to pay a fixed percentage of their income as tax, thereby discouraging ingenuous tax planning and preventing tax avoidance.

MAT and AMT – How does it operate?

While both MAT and AMT serve the same purpose—ensuring a minimum tax—they differ in their computational base:

• MAT applies to companies and is computed on “adjusted book profit” after applying adjustments as outlined in Explanation to Section 115JB of the Income-tax Act.
• AMT, applicable to non-corporates, is based on “adjusted total income” which includes total income increased by specified deductions under Section 115JC.

Now that we have a clear understanding of how MAT and AMT function, let’s delve deeper into the specific issue introduced by the Income Tax Bill, 2025, and examine its potential impact on non-corporate entities, particularly LLPs earning capital gains.

What Has Changed in the Income Tax Bill, 2025?

The Income Tax Bill, 2025 has expanded the applicability of AMT for non-corporate entities like LLPs and partnership firms. Previously, AMT was applicable only if certain deductions (e.g., under Chapter VI-A) were claimed. Importantly, long-term capital gains (LTCG) under AMT were taxed at a concessional rate of 12.5%.

However, under the new draft:

• This preferential treatment for LTCG is removed.
• A key clause from the old Act (which limited AMT to those claiming deductions) has been omitted.
• As a result, even firms / LLPs that do not claim any deductions could now be subject to AMT at 18.5%, effectively raising their tax burden.

Experts believe this omission could lead to unintended taxation of capital-gains-only LLPs, creating a substantial shift in how such entities are taxed going forward.

Provisions under Old IT Act and New IT Bill

Let’s now examine the actual language of the section to understand what has been proposed and how it differs from the existing provisions. This will help clarify the practical implications and whether the concerns about AMT’s broadened scope under the new bill are well-founded.

AMT under IT Act, 1961

 As per Section 115JEE:

• “The provisions of this Chapter shall apply to a person who has claimed any deduction under—
• any section (other than section 80P) included in Chapter VI-A under the heading “C.—Deductions in respect of certain incomes”; or
• Section 10AA; or
• Section 35AD.
• The provisions of this Chapter shall not apply to an individual or a Hindu undivided family or an association of persons or a body of individuals, whether incorporated or not, or an artificial juridical person referred to in sub-clause (vii) of clause (31) of section 2, if the adjusted total income of such person does not exceed twenty lakh rupees.”

Accordingly, AMT was applicable to the non-corporates which were claiming tax benefits under different provisions of the Act.

AMT under New ITB, 2025

 In the Income Tax Bill, 2025 (ITB) the entire MAT and AMT provisions have been consolidated in a single Section 206 of ITB. As per Section 206 of ITB, MAT and AMT is applicable if tax payable by the LLP on book profits / adjusted income is less than the rates mentioned in the table below. Relevant extract of Section 206 of ITB is as mentioned below:

• “Irrespective of anything contained in any other provision of this Act, where in the case of an assessee, referred to in column B of Table, the income-tax payable on the total income as computed under this Act in respect of a tax year is less than the percentage referred to in column C of the said Table of book profit in the case of a company or of adjusted total income in any other case, computed as per the provisions of Note to the said Table, then–
• such book profit in the case of a company or such adjusted total income in any other case shall be deemed to be the total income of that assessee for such tax year; and
• the tax payable on such total income shall be at the rate provided in column C of the said Table.

Note 1:—Adjusted total income, for the purposes of Sl. Nos. 3, 4 and 5 shall be the total income before giving effect to this section, as increased by deductions claimed, if any, under— (a) any section (other than section 149) included in Chapter VIII-C; (b) section 144; and (c) section 46 as reduced by depreciation allowable as per the provisions of section 33, as if no deduction was allowed in respect of the assets on which the deduction under that section is claimed.”

In the entire Section 206, there’s no carve out similar to Section 115JEE of the IT Act, restricting the applicability to only those non-corporate entities which are claiming tax holidays / specified deductions. Hence, based on the current language of the Section 206 of ITB, it appears that AMT has been extended to all the LLPs.

Impact of the Proposed Change

The amendments proposed in the Income-tax Bill, 2025 could significantly impact non-corporate entities such as LLPs that primarily earn income through long-term capital gains (LTCG). Under the existing law, such gains are taxed at a concessional rate of 12.5%. However, the new bill proposes to apply AMT at 18.5% even to those not claiming deductions or exemptions, effectively increasing their tax liability by 6%.

The proposed changes could have far-reaching consequences:

1. Tax Impact:

• LLPs earning only LTCG will now face an effective tax rate of 18.5%, up from 12.5%.
• This represents a 48% increasein tax liability for such entities.

2. Compliance Burden:

• Entities previously outside the AMT net must now comply with its computational and reporting requirements.

3. Policy Concerns:

• Importantly, this shift does not appear to be an oversight, as stakeholder recommendations to retain carve-outs for deduction-free entities were considered—and rejected—by the Standing Committee.
• This raises questions about the consistency of the Bill with its stated goals of simplificationand justice (Nyaya).

Who Will Be Affected?

Suggestions given by Experts/Stakeholders

Stakeholders proposed the following:

• Retaining the 12.5% rate for long-term capital gains under AMT or
• Restricting AMT only to entities claiming deductions.

Examination by the Committee

The Ministry has examined the above provisions and responded to the stating that a new clause may be inserted to clarify that AMT shall not apply to individuals, HUFs, AOPs, BOIs, or AJPs if:

(a) They have not claimed deductions under Section 10AA, Section 35AD, or Chapter VI-A (Part C), and

(b) Their adjusted total income does not exceed ₹20 lakhs.

Regarding the suggestion to differentiate AMT rates based on the nature of income, the committee reviewed the recommendation but responded by clarifying that AMT is computed on the total income and not broken down by income heads. Consequently, they dismissed the proposal, categorizing it as a “policy change” falling outside the intended scope of the Bill.

Authors Analysis

Despite reviewing the stakeholders’ recommendations, the government chose not to incorporate the requested amendments for LLP and Partnership firms. Their reasoning—that AMT is computed on total income and not income head-wise—misses the point entirely. No one asked for a head-wise computation; the request was merely to reinstate the safeguard that AMT should apply only when specified deductions are claimed, as was the case under the old Act.

It raises the question: if other policy changes have been accepted under the new bill, why ignore this one?

This appears to be either a deliberate move or a critical oversight.

• One possible intention could be to discourage the growing use of LLPs and partnership firms—where partner shares are exempt—unlike dividends from companies, which are taxable.
• Another theory is that the government wants to curb the use of such entities for investment-focused activities, though this logic seems weak since very few firms operate purely as investment vehicles.

It’s likely this issue arose during the consolidation of multiple provisions into one section and it’s quite surprising how a seemingly minor change—removing a single qualifying condition—can have such a far-reaching impact on taxpayers.

Applicable from which year?

If the ITB is passed in its current form, these changes will apply from FY 2026–27 onwards.

Final Thoughts: A Subtle Shift, a Significant Impact

The Income-tax Bill, 2025 brings several nuanced but impactful changes. The redefinition of AMT applicability is one such change that deserves attention — especially for LLPs and non-corporate entities earning only capital gains.

Tax professionals and business owners must re-evaluate entity structures, plan transactions carefully, and stay vigilant as the bill progresses. What appears to be “just a consolidation of laws” may, in practice, become a structural shift in tax strategy.

As a tax advisor or practitioner, you should:

• Review your LLP clients’ capital gains profiles for FY 2025–26 and plan proactively for FY 2026–27, factoring in the new AMT implications.
• Make your clients aware of these amendments and prepare them for the anticipated increase in both compliance obligations and tax outgo under the revised provisions.

In case you have any questions / query, you can email me at sharshil323@gmail.com.

(Republished with amendments)