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If you are someone who falls in the higher income bracket, then you might have to pay a surcharge over and above your tax. In other words, the surcharge is the additional tax required to be paid by a taxpayer due to high income. This is generally applicable to people earning an annual income of more than Rs.50 lakhs or Rs. 1 crore.
However, a surcharge leads to a significant increase in tax liability even if the income exceeds the threshold marginally. The Income Tax Act provides marginal relief to such taxpayers to prevent them from falling prey to such increased tax liabilities.
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A surcharge on income tax is an additional tax levied on individuals and firms with income exceeding specific thresholds. It targets high-income earners to ensure they contribute a larger share of taxes compared to those with lower incomes.
For individuals earning more than ₹50 lakhs annually or firms earning over ₹1 crore, an income tax surcharge is applicable. The highest surcharge rate for income above ₹5 crores has been reduced from 37% to 25%, lowering the maximum marginal tax rate from 42.74% to 39%. This applies only under the new regime.
Additionally, under the new tax regime, income up to ₹12 lakhs is eligible for a tax rebate, meaning no taxes are payable for incomes below this threshold.
Marginal relief is a provision of the Income Tax Act that aims to reduce the tax burden on individuals having an income within a specific range, especially those earning above Rs.50 lakhs.
The application of a surcharge on income exceeding a certain threshold can sometimes lead to a significant increase in tax liability for individuals whose income exceeds the threshold marginally. Marginal relief aims to ensure tax relief for such individuals. Marginal relief is only applicable on individuals who are opting for the new tax regime and is not available to those opting for the new tax regime.
Marginal relief in the old tax regime is applicable in relation to a surcharge. In simple terms, it is applicable on income exceeding Rs.50 lakhs, on which you are required to pay a surcharge. Marginal relief can be claimed on surcharge in the case of both the old and the new regime.
For instance, if an individual's income surpasses Rs. 50 lakh, marginal relief applies. This ensures that the income tax due (including surcharge) on Rs. 50 lakh does not exceed the surplus income above Rs. 50 lakh.
To illustrate, let's consider an individual with an income of Rs. 50.1 lakh:
As the income exceeds Rs. 50 lakh but remains below Rs. 1 crore, the individual incurs a surcharge at a rate of 10%, leading to a significant increase in his/her tax liability.
| Total Income | Rs. 50,10,000 |
| Tax on total income as per slab rate (excluding surcharge) | Rs. 11,88,000 |
| Surcharge @10% | Rs. 1,18,800 |
| Total Tax payable (inclusive of surcharge) | Rs. 13,06,800 |
If the income were Rs. 50 lakh, the tax payable would be Rs. 11,85,000 (before surcharge). Therefore, with an increase of Rs. 10,000 in income, the tax liability increases by Rs. 1,21,800. To address this scenario, marginal relief provisions are offered to taxpayers, preventing such significant spikes in tax liabilities.
Let’s take the above example and learn the calculation of marginal relief -
| Calculation | Amount |
|---|---|
| Income tax inclusive of surcharge on Rs. 50,10,000 | Rs. 13,06,800 |
| Calculation | Amount |
|---|---|
| Total income: | Rs. 50,10,000 |
| Tax on total income as per slab rate (excluding surcharge) | Rs. 11,88,000 |
| Addition of Surcharge after considering marginal relief | Rs. 7,000 |
| Tax payable after applying for marginal relief | Rs. 11,95,000 |
In Budget 2024, marginal relief, previously applicable only to surcharges in the old regime, was extended to the new tax regime. Under the new regime, the marginal relief provision is applicable to rebates u/s 87A.
For salaried individuals, this effective zero-tax threshold rises to ₹12.75 lakh after factoring in the standard deduction. While tax is still calculated according to tax slab rates, the rebate under Section 87A of the new regime offsets the liability up to the eligible income limit. This means even though the tax on ₹12 lakh income would be ₹60,000, taxpayers do not actually pay it because of the rebate. For example, if your income slightly exceeds the rebate limit, say by ₹5,000, and if the benefit of marginal relief did not exist, then you would have to pay full ₹60,000 tax on your income, meaning a person who earns up to ₹12 lakh will have more money in hand despite earning less than you.
Marginal relief ensures that taxpayers do not face a disproportionately high tax burden when their income marginally exceeds the rebate threshold. For example, if your income reaches ₹12.5 lakh, your tax liability as per the new regime's slab rates would be ₹70,200, (including 4% health and education cess). However, after applying marginal relief, the tax payable gets restricted to ₹50,000, equal to the amount by which the income exceeds ₹12 lakh.
This benefit continues until the point where the regular slab-based tax becomes lower than than the marginal relief amount. For salaried individuals claiming the ₹75,000 standard deduction under the new regime, zero tax benefit is available up to a gross salary of ₹12.75 lakh.
Marginal relief can continue to apply on slightly higher salaries, broadly up to around ₹13.5 lakh, meaning you do pay tax but just a lower amount because of marginal relief. After this point, normal slab taxation takes over.
| Annual income | Taxable income after standard deduction | Tax liability | Actual tax liability after Marginal Relief | Marginal relief |
|---|---|---|---|---|
| 12,80,000 | 12,05,000 | 60,7500 | 5,000 | 55,750 |
| 12,90,000 | 12,15,000 | 62,2500 | 15,000 | 47,250 |
| 13,00,000 | 12,25,000 | 63,750 | 25,000 | 38,750 |
| 13,20,000 | 12,45,000 | 66,750 | 45,000 | 21,750 |
| 13,40,000 | 12,65,000 | 69,750 | 65,000 | 4,750 |
| 13,45,588 | 12,70,588 | 70,588 | 70,588 | 0 |
When we talk about taxes, tax saving is the primary objective of every taxpayer. Having said that, there are numerous provisions in the Income Tax Act to help taxpayers reduce their tax liability. However, taxes are complicated, and making sure to claim all the possible deductions and exemptions is difficult, especially for laymen.
The Income Tax Act offers a marginal relief on an income exceeding Rs.12.75 lakhs, i.e., tax-free, to help taxpayers reduce their tax burden.
Yes, Budget 2023 extended the benefit of marginal relief to the new regime too. The maximum surcharge that can be imposed on the tax payable by an individual is capped at 25% when opting for the new tax regime.
In the financial year 2025-26 (Assessment Year 2026-27), under the new tax regime, the rebate limit has been raised to Rs. 12,00,000. This implies that a resident individual with a taxable income of up to Rs. 12,00,000 will be entitled to receive Rs. 60,000 or the amount of tax payable (whichever is lower) as tax relief.
The introduction of marginal tax relief in the new tax regime, as outlined in the Union Budget for FY24, provides significant benefits to individuals whose income slightly surpasses the tax-free limit of Rs. 12.75 lakh. This initiative is welcomed as it enables individuals in this bracket to pay considerably less tax.
To compute the surcharge, begin by determining the income tax on the amount totaling Rs. 18 lakh. With an applicable surcharge rate of 10%, the surcharge amount is calculated as 10% of Rs. 18 lakh, resulting in Rs. 1.8 lakh.
