Finance Act 2026: An overview of key accounting implications

The recently enacted Finance Act 2026, has made various amendments to both the old Income-tax Act, 1961 and the new Income Tax Act 2025 (w.e.f. 1 April 2026) as applicable to companies. Out of these amendments, the amendments related to (i) rationalization of Minimum Alternate Tax provisions, and (ii) taxation of buyback of shares which are made only to new Act, are likely to have material accounting implications for certain entities. In this article, we analyze key accounting implications likely to arise from these two amendments.

Rationalization of Minimum Alternative Tax (MAT) provisions

Pre-amendment MAT provisions applicable to domestic companies

• MAT is applicable to companies that have not opted to pay tax under the new regime as prescribed under Section 115BAA of the Income-tax Act, 1961 (as amended). In other words, MAT was applicable to companies paying tax under the old regime.
• MAT is calculated at 15% (plus applicable cess and surcharge) of the Book Profit of the Company, which is net profit shown in the Statement of Profit and Loss prepared under the Companies Act, 2013 (as amended), with specific additions and deductions as per Section 115JB of the Income-tax Act.
• Each company paying tax under the Old Regime is required to pay income tax for each financial/tax year which is the higher of:
  • Tax liability as per the normal provisions of the Income Tax Act
  • MAT liability
• If the MAT liability for any year is higher than the normal income tax liability, the excess amount paid is carried forward as a credit to be set off against normal tax liability for up to 15 subsequent years following the year of origination.

Changes introduced by the Finance Act 2026 for domestic companies

• Companies paying tax under the old tax regime will continue to be liable to pay MAT.
• The tax rate of MAT has been reduced from 15% (plus applicable cess and surcharge) to 14% (plus applicable cess and surcharge).
• From tax year 2026–27 onward, MAT paid for any year will be considered as the final tax payable for the year and no new MAT credit will be allowed for additional tax paid vis-à-vis tax liability as per the normal provisions of the Income Tax Act 2025.
• With regard to brought forward MAT credit accumulated till 31 March 2026, companies will be allowed to carry forward and offset the same if and only if they opt for new tax regime under Section 200 of the Income Tax Act 2025 from tax year 2026–27 or any subsequent tax year.
  In other words, set off of such carried forward MAT credit will no longer be available under the old regime from tax year 2026–27 onwards.
• Under the new tax regime, setting off previously accumulated MAT credit is subject to the following limits/restrictions:
  • Set off for any year is restricted to 25% of normal tax liability.
  • The accumulated credit can be carried forward for a maximum of 15 years from the year of its origination, i.e., up to the time limit prescribed pre-amendment.

Key implications and accounting considerations

Considering the above changes, entities may need to evaluate the key accounting aspects below:

1. Under Ind AS 12 – Income Taxes, an asset in respect of accumulated MAT credit entitlement is recognized only to the extent it is probable that the entity will be able to utilize the same for reduction in its normal tax liability within the period for which MAT credit is allowed to be carried forward. Deferred tax assets, including MAT credit entitlement, are reviewed at each reporting date and written down to the extent their realization is no longer probable.

   Companies having accumulated MAT credit up to financial year 2025–26 will need to reassess realization/utilization of the accumulated amount, considering their broader tax planning strategy, including their plans to adopt the new tax regime and future profitability. They will need to write down the deferred tax asset arising from accumulated MAT credit to the extent its realization is no longer probable.

   The amount written down in this manner will be recognized as income-tax expense in the Statement of Profit and Loss (but not allowable as a deduction for normal tax or MAT purposes).

   With regard to any new MAT paid from tax year 2026–27 onward, no MAT credit is allowed and therefore, the amount will be recognized as income-tax expense in the Statement of Profit and Loss immediately. The Company cannot consider the excess amount paid for the recognition of Deferred Tax Asset.

2. Under Ind AS 12, deferred tax assets and liabilities are measured at tax rates and tax laws that are expected to apply to the period when the asset is realized or the liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by the end of the reporting period.

   It is our understanding that even after enactment of the new tax regime as prescribed under section 115BAA of the Income-tax Act, 1961 (as amended), many companies continued to pay under the old tax regime, primarily considering accumulated MAT credit and ensuring its utilization.

   These companies were expected to adopt the new tax regime after utilization of accumulated MAT credit. The amendments in MAT provisions introduced by the Finance Act 2026 imply that these companies may potentially adopt new tax regime in a period earlier than originally anticipated/planned.

   Considering the above, entities may need to remeasure previously recognized deferred tax assets and liabilities. The resulting remeasurement impact, if any, will be recognized as income-tax expense in the Statement of Profit and Loss.

Taxation of buyback of shares

Pre-amended provisions of the Income-tax Act, 1961

The Finance (No.2) Act 2024 made significant changes to the taxation of buyback of shares made by a company under section 68 of the Companies Act 2013 (as amended). In accordance with the pre-amended provisions, the entire consideration received by a shareholder on buyback of shares by a company is treated as dividend income under section 2(22)(f) of the Income-tax Act, 1961 and taxed accordingly. At the same time, the cost of acquisition of the shares extinguished pursuant to the buyback is recognized separately as a capital loss under section 46A of the Incometax Act, 1961. Accounting considerations relating to changes introduced by the Finance (No.2) Act 2024 have been discussed in the October 2024 edition of Assurance EYe.

Changes introduced by the Finance Act, 2026 in the new Income-tax Act, 2025 w.e.f 1 April 2026

In accordance with the Finance Act, 2026, the buyback of shares will be treated akin to the sale of shares for the buyback price, in the hands of the shareholder. Consequently, consideration received on buyback of shares less acquisition cost will be taxed under the head “Capital Gains,” instead of treating the same as dividend income. While the non-promoter shareholders will be taxed at the rates applicable to capital gains on sale of shares, an additional tax rate has been levied for promoter shareholders. The table below captures the applicable tax rates (excluding surcharge and cess):

The amendment will take effect from tax year 2026-27 onward.

Accounting consideration

Considering changes in the law, accounting considerations discussed in the October 2024 edition of Assurance EYe will not apply. Since the buyback of shares is treated at par with the sale of shares, entities having investment in shares will evaluate difference, if any, between the carrying amount of investment and their tax base (acquisition cost) for recognition of deferred tax asset/ liability in accordance with Ind AS 12 requirements. To the extent a promoter shareholder is expected to realize shares through buyback, then they will need to measure deferred tax asset/ liability, if any, using such higher rate.

Concluding remarks

The amendments introduced through the Finance Act, 2026, may have a significant impact on the measurement of deferred tax assets/ liabilities and, consequently, income-tax expense, for many entities. It is imperative that entities make an appropriate evaluation of likely impact and ensure due adjustment.