Surcharge on Income Tax: A Guide for Taxpayers
You may have to pay an extra surcharge on your income tax liability beyond a certain amount if you are in a higher income tax band. In layman's terms, an income tax surcharge is an additional tax that taxpayers who make more than a particular amount must pay. With the surcharge provision, our government makes sure that the wealthy pay a larger share of income taxes than the poor. Additionally, it gives a select category of taxpayers a little reprieve from the surcharge. Budget 2023 states that if you choose to use the new tax system, the maximum surcharge that can be applied to an individual's income is limited to 25%. To learn more about the income tax surcharge, continue reading.
Table of Contents:
What is Surcharge?
A surcharge is an additional charge, tax, or fee that is added to the original price of a good or service. A surcharge is not included in the price that is first quoted for a good or service; rather, it is added to the current tax.
What is Surcharge on Income Tax in India?
An additional amount that you must pay on your income tax is known as the income tax surcharge. If an individual's income exceeds Rs. 50 lakh or Rs. 1 crore in the case of a company, there is a surcharge on income tax. A surcharge on income tax is provided for taxpayers whose income is below the upper tax band of 30% under the Income Tax Act. If your income is within the 30% tax slab, you will have to pay an extra surcharge on your income tax liability.
Surcharge Rates for Different Taxpayers
Various surcharge rates apply to various taxpayers, as specified by the Income Tax Act of 1961. With the highest surcharge rate on income exceeding 5 crores being lowered from 37% to 25%, the maximum marginal rate of tax would decrease from 42.74% to 39% of income. This will only be applicable under the new tax structure as of April 1, 2023. Let's emphasise the various surcharge rates that apply to various taxpayer types.
Surcharge Rates for Individuals
At first, the 10% surcharge was applied to people whose total income exceeded Rs. 1 crore. The 2015 Budget raised this tax to 12%, and the 2016 Budget raised it even more to 15%. A surcharge has been applied to those whose income exceeds Rs. 50 lakh as of 2017. For individuals, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), and Artificial Judicial Persons, whichever tax system you choose. The highest surcharge rate of 37% will be lowered to 25% under the new tax regime, under the law, starting on April 1, 2023.
AOPs with only businesses as members will pay a 15% surcharge. It is applicable to AOPs with annual gross incomes of more than Rs 1 crore throughout the fiscal year. The maximum surcharge on listed equity shares, units, etc. for long-term capital gains (LTCG) is 15%.
Surcharge for Domestic Companies
There would be a surcharge of 10% of income tax calculated under sections 115BAA or 115BAB. No respite is available because there is no upper limit to the surcharge's applicability.
Surcharge for Foreign Companies
Surcharge for Local Authorities, Partnerships, and LLPs
In cases when the aggregate income above is one crore, a surcharge of 12% of the calculated income tax is due.
Calculation of Surcharge
The Gross Total Income, or GTI, is the sum of the incomes of five different heads. The Net Total Income is then calculated by deducting various amounts under Chapter VI A from this GTI. This is the income that's used to compute taxes. Whether an assessee is an individual, firm, domestic company, etc. determines the tax rate. The rate of surcharge is applied to the tax amount once it has been determined. Therefore, rather than calculating a surcharge on income, the surcharge is computed on the total income tax. The income level is only taken into account when determining whether the surcharge is applicable. The surcharge is computed on the income tax, not the income, once the total income is determined.
Illustrations:
Case 1: Assuming a person has a taxable income of Rs. 49 lakh, there is no surcharge because the total taxable income is less than the minimum threshold limit of Rs. 50 lakh. The tax due will therefore be determined using the appropriate slab rates.
Case 2: In this instance, the individual is subject to a 10% surcharge since his taxable income exceeds Rs. 50 lakh but falls short of Rs. 1 crore. The regular slab rate of Rs. 12,75,000 is to be used to compute the income tax on Rs. 53 lakh. Since there is a 10% surcharge in this instance, the amount of the surcharge would be 10% of Rs. 12,75,000, or Rs. 1,27,500. The total amount of income tax that would be due, including the surcharge, would be Rs. 14,02,500 (Rs. 12,75,000 + Rs. 1,27,500).
Case 3: In this instance, the individual is subject to a 15% surcharge since his taxable income exceeds Rs. 1 crore. The regular slab rate of Rs. 29,85,000 is to be used to compute the income tax on Rs. 1.1 crore. Since there will be a 15% surcharge in this instance, the amount of the fee would be equal to 15% of Rs. 29,85,000, or Rs. 4,47,750. It would therefore be necessary to pay income tax of Rs. 34,32,750 (including surcharge) (Rs. 29,85,000 + Rs. 4,47,750).
What is Marginal Relief?
All individuals or organisations whose total income exceeds Rs. 50 lakh or Rs. 1 crore, respectively, are required to pay the surcharge, which is imposed if the assessee's total income exceeds the minimum amount prescribed. In some circumstances, assesses may still be required to pay a surcharge even if their income is only slightly above the threshold. The idea of marginal alleviation is presented in order to provide such assessees with relief. As the name implies, marginal relief is the exemption from surcharge levied against the taxpayer in cases where the taxpayer's income barely exceeds the allowed limits. The aim of marginal relief is to guarantee that the total tax payable, including the surcharge, does not surpass the income that is above the designated level. For instance, there will be minor relief if the individual's income exceeds Rs. 50 lakh. This would guarantee that the amount of income tax that must be paid (including the surcharge) on Rs. 50 lakh does not exceed the amount by which the person's income surpasses Rs. 50 lakh.
Marginal Relief for Individuals
Your income tax payment is capped at 40% of the difference between your total income and your tax exemption level with marginal relief. Once minimal relief is granted, you are not eligible to claim any more income credits. Certain taxpayers will receive a marginal relief in accordance with the Surcharge Provisions set under the Income Tax Act. This relief will be equivalent to the difference between the amount of income that exceeds the stipulated limit (Rs. 50 Lakhs or Rs. 1 Crore) and the tax payable (including surcharge) on income over that limit. Your income tax payment is capped at 40% of the difference between your total income and your tax exemption level thanks to marginal relief. Once minimal relief is granted, you are not eligible to claim any more income credits.
Illustration:
Z makes more than the 50 lakh limit but not more than Rs. 1 crore in total income (net income after all allowable deductions or the taxable income) in a financial year. Z will therefore be required to pay an additional 10% income tax surcharge. Consequently, there would be a total of Rs. 14,76,750 in taxes due. Z would have only had to pay Rs. 13,12,500 if he had only made Rs. 50 lakhs. This means that if he had made an additional Rs. 1 lakh, he would have had to pay an additional Rs. 1,64,250 in income tax. Z receives a marginal relief of the difference between the amount of income that surpasses Rs. 50 lakhs, or 1 lakh (Rs. 51,00,000 – Rs. 500,00,000), and the excess tax payable, or Rs. 1,64,250 (Rs. 14,76, 750 – Rs. 13,12,500). Z would earn a marginal alleviation of Rs. 64,250 (Rs. 1,64,250 – Rs. 1,00,000).
Marginal Relief for Domestic Companies
In case you run a domestic firm with a revenue ranging from Rs. 1 crore to Rs. 10 crore, an additional 7% income tax surcharge will be applicable to you. A company falling within the range of Rs. 1 crore to Rs. 10 crores will receive marginal relief. The relief will be the difference between the amount over Rs. 1 crore and the amount of income tax that must be paid (including the surcharge on the higher income).
Illustration:
For example, you will be required to pay income tax plus the 7% income tax surcharge if the entire income of your company is Rs. 1.01 crores. Therefore, there will be a total tax obligation of Rs. 27.04 lakhs. (After deducting the health and education cess and obtaining the 87A rebate) On the other hand, your tax liability would have been reduced to just Rs. 26 lakhs if your company's total revenue had been Rs. 1 crore. In other words, you are paying an additional Rs. 1.04 lakhs in income tax for a Rs. 1 lakh increase in income. Therefore, a company is eligible for a marginal relief, which is equal to the difference between the amount over Rs. 1 crore, or Rs. 1 lakh in this case, and the excess tax owed on higher income, or Rs. 1.04 lakhs. A total of Rs. 1,04,00 - Rs. 1,00,000 = Rs. 4,000 is the minor relief.
Marginal Relief for Firms
If a company's total revenue surpasses one crore rupees, a 12% surcharge will be applied. The difference between the income tax due (including the surcharge) and the amount over Rs. 1 crore in this scenario will be the marginal relief.
Illustration:
For example, you will be required to pay income tax plus the 12% income tax surcharge if your company's total revenue is Rs. 1.01 crores. As a result, there will be a total of 32.24 lakhs in taxes due. 2. Taxes would only need to be paid in the amount of Rs. 31.2 lakhs if your company's total revenue was Rs. 1 crore. In other words, you are generating an additional income of Rs. 1 lakh, but you are paying an additional Rs. 1.04 lakh in income tax. As a result, your company is eligible for a marginal relief, which is equal to the difference between the excess tax that is due on higher income—that is, Rs. 1.04 lakhs—and the amount that exceeds Rs. 1 crore—that is, Rs. 1 lakh in this instance. As a result, your marginal relief equals Rs. 4,000 (1,04,000 – 1,00,000).
Conclusion
When it comes to taxes, everyone's main goal is to save as much money as possible. Nevertheless, the Income Tax Act contains a number of provisions that assist people in lowering their tax liability. But because taxes are so intricate, it can be challenging, particularly for novices, to ensure that they are claiming all available deductions and exemptions. If you think you are liable to pay a tax surcharge, you should consult an expert to get the best advice and reduce your tax liability as far as possible.
FAQ
Q1. Is it compulsory to pay a surcharge on income tax?
Yes, in addition to the tax you owe, you will be required to pay an additional sum if your income within a given fiscal year exceeds Rs. 50 lakh.
Q2. Does a surcharge apply 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 to 25%.
Q3. What is the latest update in income tax surcharge for FY 2023-2024?
The rates of surcharge for FY 2024–2025 remain 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.
Q4. Why are surcharges imposed?
Surcharges are typically imposed by governments for a variety of purposes, such as raising additional funds, deterring particular behaviour, or supporting particular initiatives.
Q5. Are surcharges deductible from taxable income?
Generally speaking, no. Usually, surcharges increase your net tax liability instead of lowering your taxable income. It is advisable, therefore, to speak with a tax professional in your taxation region.
Q6. On which taxes are surcharges levied?
Surcharges are imposed on top of income taxes and other taxes based on government policy.
Q7. Is there a way to avoid paying surcharges?
One can reduce their tax liability by managing their income and preparing taxes carefully. Contacting a tax adviser is the best option for customised advice.
Q8. What is the marginal relief under Section 87A new tax regime?
The rebate ceiling has been raised to Rs. 7,00,000 for the financial year 2023–2024 (assessment year 2024–25) under the new tax regime. According to this, a resident who has taxable income up to Rs. 7,00,000 may be entitled for a tax reduction of up to Rs. 25,000, or the appropriate tax amount, whichever is lower.
Q9. What is the limit of marginal relief in the new tax regime?
To assist taxpayers in lowering their tax burden, the Income Tax Act provides a marginal relief on an income exceeding Rs. 7.5 lakhs, which is tax-free.
Q10. Who is eligible for marginal relief?
For those with income marginally above the tax-free threshold, 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.
Q11. Can marginal relief be claimed by individuals?
Yes, anyone for whom a surcharge is applicable may claim marginal relief.
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