marginal relief surcharge

Do you come under one of the higher income tax brackets i.e. 30%? – If yes, you maybe liable to pay an additional surcharge on your Income Tax liability over some limit. To simplify, a surcharge on income tax is an extra tax to be paid by the taxpayers earning a higher income i.e. beyond a certain limit.

Our government ensures that with the surcharge provision, the rich contribute to the income taxes more than the poor. It also provides a marginal relief on the surcharge for a certain class of taxpayers. Let’s see the related provisions in detail:

Latest update 

• The highest surcharge rate on income above 5 crores is changed from 37% to 25%, which will reduce the Maximum Marginal rate of Tax from 42.74% to 39% of income. This will be applicable only under the new tax regime from 1st April 2023.
• A tax rebate is introduced on income upto 7 lakhs in the new tax regime. This would mean you won't have to pay tax if your income is less than Rs. 7 lakhs.

Surcharge on Income Tax

Income tax surcharge is an additional charge payable on income tax. It is an added tax on the taxpayers having a higher income inflow during a particular financial year.

Surcharge Rates for Different Taxpayers (Current Rates)

There are different rates of surcharge applicable to different taxpayers under the Income Tax Act, 1961. From 1st April 2023, the highest surcharge rate of 37% shall be reduced to 25% under the new tax regime.

Surcharge Rates for Individual/HUF/AOP/BOI/ Artificial Judicial Person

*Budget 2023 Update: Under new tax regime, the highest surcharge of 37% has been reduced to 25% which will be applicable from 1st April 2023 (FY 2023-24)

Note:

• Surcharge for AOPs having only companies as its members to 15%. It is applicable to AOPs whose total income during the financial year exceeds Rs 1 crores. 
• Surcharge on long term capital gains(LTCG) on listed equity shares, units, etc., has been capped at 15%. 

Surcharge Rates for Domestic Company

* Surcharge @10% of income-tax computed under section 115BAA or section 115BAB would be leviable. Since there is no threshold limit for the applicability of surcharge, consequently, there would be no relief.

Surcharge Rates for Foreign Company

Surcharge rates for Firm/ LLP/ Local Authority :

Where the total income exceeds 1 crore, surcharge is payable at the rate of 12% of income-tax computed.

Marginal Relief for Individuals

Case 1: Where the total income* is more than Rs.50 Lakhs but does not exceed Rs.1 crore, the taxpayers have to pay a surcharge at the rate of 10% on the income tax computed. 
*Here total income means the net income after all possible deductions or the taxable income. (Calculate your taxes here.) 

According to the Income-tax provisions, a marginal relief will be provided to certain taxpayers up to the amount of the difference between the excess tax payable (including surcharge) on the income above Rs.50 lakhs and the amount of income that exceeds Rs.50 Lakhs. 
Suppose, an individual has a total income of Rs.51 Lakhs in a FY 2023-24.

• He will have to pay taxes inclusive of a surcharge of 10% on the tax computed i.e., total tax payable will be Rs. 14,76,750.
• But, if he would have earned only Rs.50 lakhs, then the tax liability would have been Rs.13,12,500 only(excluding cess). 
• Isn’t it unfair for the individual? For earning an extra Rs.1,00,000, he will end up paying income tax of Rs.1,64,250. The individual’s tax liability should be reduced to avoid any such excess tax payable. 
• The individual will get a marginal relief of the difference amount between the excess tax payable on higher income i.e (Rs.14,76, 750 minus Rs.13,12,500 = Rs.1,64,250 ) and the amount of income that exceeds Rs. 50 Lakhs i.e. (Rs.51,00,000 minus Rs.50,00,000 = Rs.1,00,000). 
• The marginal relief will be Rs.64,250 (Rs.1,64,250 minus Rs.1,00,000). 
• Hence, income tax liability on income of Rs. 51,00,000 will be Rs.14,12,500 (excluding cess)

Note : If tax is paid in new tax regime surcharge would remain the same, but the income tax slab will change to the below mentioned slab: 

First 3,00,000 - Nil 

Next 3,00,001 – 6,00,000 - @5% 

Next 6,00,001 – 9,00,000 - @10% 

Next 9,00,001 – 12,00,000 - @15% 

Next 12,00,001 – 15,00,000 - @20% 

More than 15,00,000 - @30%  

Case 2: Where the total income is more than Rs.1 crore but less than Rs. 2 crore

• A surcharge of 15% will be levied on the income tax payable.
•  A marginal relief will be provided to the taxpayer up to the amount of difference between the excess tax payable (including surcharge) on income above Rs.1 crore and the amount of income that exceeds Rs.1 crore. 
• Suppose, if the total income of an individual is Rs.1.01 crore in any FY, he will have to pay tax inclusive of a surcharge of 15% on the tax computed i.e., total tax payable will be Rs.32,68,875. 
• But, if he would have earned only Rs.1 crore, then the tax payable would have been Rs.30,93,750 only. For earning an extra Rs.1,00,000, he will end up paying income tax of Rs.1,75,125. 
• Hence, the individual will get a marginal relief of the difference amount between the excess tax payable on higher income i.e (Rs.1,75,125 ) and the amount of income that exceeds Rs.1 crore i.e. (Rs. 1,00,000, in this case). 
• The marginal relief will be Rs.75,125 (Rs.1,75,125 minus Rs.1,00,000).

Note: If tax is paid in the new tax regime surcharge would remain the same, but the income tax slab will change, which is  mentioned above.

Marginal Relief for Firms/LLP/Local Authorities

Where the total income is more than Rs.1 crore, a surcharge of 12% will be levied on the income tax payable. A marginal relief will be provided to such taxpayers having a total income of more than Rs.1 crore i.e., the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs.1 crore by more than the amount of income that exceeds Rs.1 crore. To simplify, if the total income of a firm is Rs.1.01 crores, it will have to pay an income tax inclusive of a surcharge of 12% on the tax computed i.e., total tax payable will be Rs.32,24,000. But, if the total income would have been only Rs. 1 crore, then the tax payable would have been Rs.31,20,000 only. For earning an extra Rs.1,00,000, it will end up paying income tax of Rs.1,04,000.

Hence, the firm will get a marginal relief of the difference amount between the excess tax payable on higher income i.e. (Rs.1,04,000) and the amount of income that exceeds Rs.1 crore i.e. (Rs.1,00,000, in this case). The marginal relief will be Rs.4,000 (Rs.1,04,000 minus Rs.1,00,000).

Marginal Relief for Companies

Case 1: Where the total income of a domestic company is more than Rs.1 crore but does not exceed Rs.10 crore, a surcharge of 7% will be levied on the income tax payable.

Similarly, for foreign companies having total income more than Rs.1 crore but less than Rs. 10 crores,  a surcharge of 2% will be levied on the income tax payable.

Marginal relief will only be provided to such companies having a total income of more than Rs.1 crore but less than Rs.10 crores i.e., the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs.1 crore by more than the amount of income that exceeds Rs.1 crore.

Case 2: Where the total income of a domestic company is more than Rs.10 crores, a surcharge of 12% will be levied on the income tax payable.

Similarly, for foreign companies having total income more than Rs.10 crores,  a surcharge of 5% will be levied on the income tax payable.

Marginal relief will only be provided to such companies having a total income of more than Rs.10 crores i.e., the income tax payable (including surcharge) on the higher income should not exceed the income tax payable on Rs.10 crores by more than the amount of income that exceeds Rs.10 crores.