A Guide on Income Tax Surcharge & Marginal Relief
Updated: Aug 28
You may be required to pay an additional charge on top of your tax if you are in the higher income category. Stated differently, the surcharge is the extra tax that a taxpayer must pay as a result of their high income. This normally applies to anyone making more than Rs. 50 lakhs or Rs. 1 crore per year. However, even in cases when income is slightly over the threshold, a surcharge results in a large rise in tax payments. To keep these taxpayers from becoming victims of such increasing tax responsibilities, the Income Tax Act offers them a small amount of assistance. The income tax surcharge rate and marginal relief under the previous and current regimes will be thoroughly explained in this article.
Table of Contents
What is Surcharge on Income Tax
A surcharge on income tax is an extra amount of tax that a person must pay if their income surpasses a specific level. Only those in the highest income band should be affected by this. This was put in place to make sure that the wealthy paid the government a higher share of their taxes than the underprivileged. If an individual's annual income exceeds Rs. 50 lakhs, or Rs. 1 crore for firms, there is an additional income tax surcharge. The maximum marginal rate of tax would drop from 42.74% to 39% of income as a result of the highest surcharge rate on income over 5 crores being reduced from 37% to 25%. As of April 1, 2023, this will only be applicable under the new tax structure. Under the new tax regime, income up to Rs. 7 lakhs is eligible for a tax refund. This implies that if your income is less than Rs. 7 lakhs, you will not be required to pay taxes.
Surcharge for Different Taxpayers
The Income Tax Act of 1961 specifies different surcharge rates that apply to certain taxpayers. Under the new tax structure, the highest surcharge rate of 37% will drop to 25% as of April 1, 2023. The following tables elucidate the surcharge rates for different categories of taxpayers under the old and new tax regimes.
Table 1: Individual/HUF/ BOI/AOP/Artificial Judicial Person
Net Taxable Income limit | Surcharge Rate under old tax regime | Surcharge Rate under new tax regime |
Below Rs 50 lakhs | Nil | Nil |
Rs 50 lakhs-Rs 1 Crore | 10% | 10% |
Rs 1 Crore-Rs 2 Crore | 15% | 15% |
Rs 2 Crore-Rs 5 Crore | 25% | 25% |
More than Rs 5 Crore | 37% | 25% |
The highest surcharge, which was previously set at 37%, has been lowered to 25% under the new tax regime and will take effect on April 1, 2023 (FY 2023–24). 15% surcharge for AOPs with sole businesses as members. It is applicable to AOPs with annual gross incomes of more than Rs 1 crore. The maximum surcharge on long-term capital gains (LTCG) on equity shares, units, and other listed equities has been set at 15%.
Table 2: Domestic Companies
Net Taxable Income limit | Surcharge Rate under normal provisions | Surcharge Rate as per Section 115BAA or 115BAB |
Less than Rs.1 Crores | - | 10%* |
Rs 1 Crore-Rs 10 Crore | 7% | |
More than Rs.10 Crores | 12% |
A 10% surcharge on income tax calculated in accordance with either section 115BAA or section 115BAB would be imposed. There would be no respite because there is no upper limit to the surcharge's applicability.
Table 3: Foreign Companies
Net Taxable Income limit | Surcharge Rate |
Rs 1 Crore- Rs 10 Crore | 2% |
More than Rs.10 Crores | 5% |
Surcharge rate for Local Authority, LLP, and Firm: In cases when the aggregate income is above one crore, a surcharge of 12% of the calculated income tax is due
Calculation of Tax Payable on Surcharge
The entire amount of income tax that must be paid, including the income tax surcharge, is determined by a number of variables, including the taxpayer's total income, the applicable income tax slab, and the surcharge rate. A surcharge is an extra tax imposed on the income tax due, which is determined by the total income of the taxpayer. Here are the steps for calculating it:
Step 1: To begin, figure out how much income tax you owe based on the relevant slab rates for your overall income.
Step 2: Apply the appropriate surcharge rate to your income tax liability based on your income band. For instance, there is a 10% income tax surcharge if your total income exceeds Rs. 50 lakh but is less than Rs. 1 crore.
Step 3: Apply the Health and Education Cess, which is normally equal to 4% of the income tax plus surcharge, after you have added the surcharge.
Step 4: Determine the total tax payable. The total tax liability is equal to the sum of the income tax, surcharge, and cess.
Illustration:
The surcharge would be Rs. 1 lakh (10% of Rs. 10 lakh) if a person's income tax is Rs. 10 lakh and they are in the 10% surcharge category. The total tax payable will be Rs. 11 lakh + Rs. 44,000 (4% of Rs. 11 lakh) = Rs. 11.44 lakh after adding the 4% cess on Rs. 11 lakh (Rs. 10 lakh income tax + Rs. 1 lakh surcharge).
What is Marginal Relief?
A section of the Income Tax Act known as marginal relief attempts to lessen the tax burden on people whose income falls within a particular range, particularly those who make more than Rs. 50 lakhs. When a surcharge is applied to income beyond a specific threshold, people whose income only slightly exceeds the threshold may find their tax liability significantly increases. The goal of marginal relief is to provide these people with tax breaks. Only persons who choose the new tax system are eligible for marginal relief; those who do not qualify for the new tax regime are not eligible for it.
Marginal Relief for Individuals
Example 1: In cases where the total income surpasses Rs. 50 lakh but falls short of Rs. 1 crore, the taxpayers are required to pay an additional 10% income tax on the computed income. Here, "total income" refers to either the taxable income or net income after all potential deductions. Make your tax calculations here. The income-tax laws state that certain taxpayers would receive a marginal relief up to the difference between the amount of income that exceeds Rs. 50 lakhs and the excess tax owed (including surcharge) on the income exceeding Rs. 50 lakhs. Assume that a person's total income for the fiscal year 2023–2024 is Rs. 51 lakhs.
He will be required to pay taxes that include a 10% surcharge on the amount of tax that is computed, for a total tax liability of Rs. 14,76,750.
However, if he had just made Rs. 50 lakhs, his tax obligation would have only been Rs. 13,12,500 (not including the cess).
Notably, he will ultimately have to pay income tax of Rs. 1,64,250 for making an additional Rs. 1,00,000. Reducing the individual's tax liability is necessary to prevent any unnecessary taxes from being paid.
The person will receive a marginal relief equal to the difference between the amount of income that surpasses Rs. 50 lakhs (Rs. 51,00,000 minus Rs. 50,00,000 = Rs. 1,00,000) and the excess tax owed on higher income (Rs. 14,76, 750 minus Rs. 13,12,500 = Rs. 1,64,250).
The difference between Rs. 1,64,250 and Rs. 1,00,000 = Rs. 64,250 represents the marginal relief.
Therefore, the income tax obligation (minus cess) on income of Rs. 51,00,000 will be Rs. 14,12,500.
Example 2: When the overall revenue exceeds one crore but falls short of two crores, the following factors come into play.
There will be a 15% surcharge applied to the amount of income tax due.
The taxpayer would receive a marginal relief up to the difference between the amount of income that exceeds Rs. 1 crore and the excess tax payable (including surcharge) on income above Rs. 1 crore.
Assuming that an individual's entire income in any given fiscal year is Rs. 1.01 crore, they will be required to pay tax along with a 15% surcharge on the tax that is computed, meaning that their total tax liability will be Rs. 32,68,875.
However, the amount of tax that would have been due would have only been Rs. 30,93,750 if he had just made Rs. 1 crore. He will have to pay an extra Rs. 1,00,000 in income tax, totalling Rs. 1,75,125.
As a result, the person will receive a marginal relief of the difference between the amount of excess tax that is due on higher income (Rs. 1,75,125) and the amount of income that surpasses Rs. 1 crore (Rs. 1,00,000 in this example).
The marginal relief will be Rs. 75,125 (i.e., Rs. 1,75,125 – Rs. 1,00,000).
Marginal Relief for Companies
Example 1: In cases where a domestic company's total income surpasses Rs. 1 crore but falls below Rs. 10 crore, an additional 7% tax will be applied to the amount of income tax that needs to be paid. Likewise, a surcharge of 2% would be applied to the income tax that foreign corporations with total incomes exceeding Rs. 1 crore but less than Rs. 10 crore must pay. Only those companies with a total income exceeding Rs. 1 crore but less than Rs. 10 crore will qualify for marginal relief; that is, the income tax payable (including surcharge) on the higher income cannot surpass the income tax payable on Rs. 1 crore by the amount of income exceeding Rs. 1 crore.
Example 2: If a domestic company's total income exceeds Rs. 10 crores, an additional 12% tax will be applied to the amount of income tax that must be paid. Similarly, a 5% surcharge would be applied to the amount of income tax that foreign enterprises with total incomes exceeding Rs. 10 crores must pay. Only companies with a total income over Rs. 10 crores will be eligible for marginal relief; that is, the income tax payable (including surcharge) on the higher income cannot surpass the income tax payable on Rs. 10 crores by the amount of income exceeding Rs. 10 crores.
Marginal Relief for Firms, LLPs, and Local Authorities
A 12% surcharge will be applied to the amount of income tax that must be paid in cases where the total income exceeds Rs. 1 crore. For those taxpayers whose total income exceeds Rs. 1 crore, a marginal relief will be granted. This means that the income tax payable (including surcharge) on the higher income cannot surpass the income tax payable on Rs. 1 crore by the amount of income exceeding Rs. 1 crore. To put it simply, a firm with a total income of Rs. 1.01 crores is required to pay income tax plus a 12% surcharge on the amount of tax computed, for a total tax due of Rs. 32,24,000 total. However, the tax that would have been due would have only been Rs. 31,20,000 if the entire revenue had only been Rs. 1 crore. It will ultimately pay an income tax of Rs. 1,04,00,000 for earning an additional Rs. 1,00,000.
Conclusion
To raise additional funds for the government, high-income people and corporations in India are subject to an additional tax known as the surcharge on income tax. Careful analysis is required due to its impact on economic behaviour and overall tax liability. For India's tax strategy to be effective, finding a balance between the need to raise revenue and the promotion of economic growth is still essential. To minimise their tax obligation, taxpayers need also be informed on marginal relief and surcharge rates.
FAQ
Q1. Is it mandatory to pay a surcharge on income tax?
Yes, if your income in a given fiscal year is more than Rs. 50 lakh, you will have to pay an additional amount on top of the tax that you owe.
Q2. Can individuals claim marginal relief?
Yes, anyone for whom a surcharge is applicable may claim marginal relief.
Q3. Is it possible to avoid having to pay surcharges?
With careful tax preparation and income management, one may be able to lower their tax liability. For tailored guidance, it's best to speak with a tax advisor.
Q4. What is the change in income tax surcharge for FY 2023-2024?
The rates of surcharge for FY 2024–2025 are the same as those for FY 2023–2024. However, the maximum surcharge you would have to pay under the new tax regime has been lowered from 37% to 25% if you choose to use it and your taxable income exceeds Rs. 5 crore.
Q5. Is a surcharge applicable in the new tax regime?
According to the Budget 2023, if an individual chooses to use the new tax regime, the maximum surcharge that can be applied to their tax liability is restricted at 25%.
Q6. What is the marginal relief under section 87a new tax regime?
Under the new tax regime, the rebate maximum has been increased to Rs. 7,00,000 for the financial year 2023–2024 (assessment year 2024–25). This suggests that a resident person having taxable income up to Rs. 7,00,000 will be eligible for tax reduction in the amount of Rs. 25,000 or the applicable tax amount, whichever is less.
Q7. Who is eligible for marginal relief?
For those whose income is marginally above the tax-free threshold of Rs. 7.5 lakh, the Union Budget for FY24's implementation of marginal tax reduction offers substantial advantages. This is a good idea because it allows people in this tax bracket to pay a significant amount less in taxes.
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