Income Tax Surcharge Rate & Marginal Relief

Surcharge on Income Tax - Meaning

Surcharge on Income tax refers to an additional tax that an individual is required to pay if his/her income exceeds a certain threshold. This applies only to the high income bracket individuals. This has been introduced to ensure that the rich pay more tax contributions to the government than the poor.

A surcharge on income tax is levied if the annual income exceeds Rs.50 lakhs for individuals and Rs.1 crore for companies.

Surcharge Rates for Different Taxpayers

Note: If your income is more than Rs.1 crore but less than Rs.2 crore, then a surcharge will be levied at 15%.

The Income Tax Act allows individuals to claim a marginal relief on income above Rs.50 lakhs. The marginal relief can be calculated as the difference between excess tax payable and the amount exceeding Rs.50 lakhs.

Budget 2023 Update for Surcharge on Income Tax Calculation

Below are the amendments made in Budget 2023 -

• The maximum surcharge rate was reduced from 37% to 25% w.e.f. 1st April 2023 for FY 2023-24.
• The surcharge for AOPs was reduced to 15%, exclusively consisting of companies. This amendment is applicable only if the annual income exceeds Rs.2 crores.
• The maximum surcharge rate on long-term capital gains from units of listed equity shares, units, and other assets has been capped at 15%.

What is Marginal Relief?

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 surcharge on income exceeding 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 not available to those opting for the new tax regime.

Marginal Relief on Surcharge in Old 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.

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.

Marginal Relief Calculation

Let’s take the above example and learn the calculation of marginal relief -

• Step 1: Calculation of income tax and surcharge

  Calculation	Amount
  Income tax inclusive of surcharge on Rs. 50,10,000	Rs. 13,06,800

• Step 2: Comparison of additional income and incremental tax
  • Incremental salary: Rs.(50,10,000 - 50,00,000) = Rs. 10,000
  • Incremental Tax:
    • Income tax inclusive of surcharge on Rs. 50,10,000: Rs. 13,06,800
    • Income tax on Rs. 50,00,000: Rs. 11,85,000
    • Incremental Tax = Rs. 13,06,800 - Rs. 11,85,000 = Rs. 1,21,800
  Since the incremental tax (Rs. 1,21,800) exceeds the incremental income (Rs. 10,000), the assessee qualifies for Marginal Relief. The total incremental tax, inclusive of the surcharge, will be capped at Rs. 10,000 based on the concept of marginal relief.
• Step 3: Calculation of Surcharge considering marginal relief

  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

Marginal Relief in New Tax Regime

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.

This amendment will help reduce the tax liability for those individuals whose annual income exceeds the limit of Rs.7.5 lakhs marginally.

Let us see how this works -

As per budget 2023, income from Salary up to Rs. 7,50,000 is tax-free.
Here is the calculation -

What if the salary is Rs. 7.6 Lakh?

This implies that earning just 10,000 more in salary increases your tax liability from ‘0’ to ‘27,040’, which is a significant increase.

According to the marginal tax relief, the tax amount owed on income between Rs. 7,50,001 and Rs. 7,77,778 is based on the additional income above Rs. 7.5 lakh, rather than the tax rate slabs. This helps reduce the tax liability in a case where a slight increase in taxable income significantly increases the tax liability. Thus, the actual tax owed will be Rs. 10,000 instead of Rs. 27,040.

Refer to the table below for actual tax liabilities at different income levels.

The income level of Rs. 7,77,778 is the breakeven point. For incomes above this threshold, tax liability would be lower when following the tax slabs. For instance, let's take someone earning Rs. 8 lakh. Their tax liability, as per the tax slabs, would be Rs. 35,000. This is lower than the tax liability of Rs. 50,000 if we consider the income above Rs. 7 lakh (Rs. 8 lakh minus Rs. 50,000).

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 ITR filing for FY 2023-24 has started, and it is important to file your ITR to maximize your tax refund and avoid penalties and notices. Take help from professional CAs and ensure accurate ITR filing. Get CA-assisted ITR filing now!